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Loan Universe Looks Strong

More than 80% of home loans outstanding were originated since 2002, according to a Mortgage Bankers Association study. Most are just entering their peak period of default risk.

But a peak beneath the numbers suggests that today's outstanding mortgage loans, on balance, may prove more resilient than expected. Nearly $4 trillion of home loans were made in 2003 alone, at the height of the refinancing boom. And the MBA believes the trend is even more apparent in the subprime credit sector, where almost 75% of outstanding loans were made since 2003.

The average age for outstanding loans at the beginning of this year was three years. For subprime adjustable-rate home loans, the average age was two years.

But many facets of the mortgage debt outstanding are positive omens suggesting that default rates may not spike as a result of loan seasoning.

In part, that's because today's homeowners have lower interest rates on their mortgages than in the past. Many have shaved hundreds of basis points off their rate by refinancing.

In fact, almost half of outstanding mortgages had a current coupon rate below 6% at the end of 2005, according to the National Housing Survey. About 40% of the rest had coupon rates between 6% and 8%.

Moreover, the vast majority of homeowners have loan-to-value ratios below 80%, reflecting strong home price appreciation in most parts of the country in recent years. Even borrowers with young loans disproportionately have substantial equity. In 2005, only about 23% of home purchase loans had LTV ratios above 80%, the MBA concluded from Federal Housing Finance Board data. Those LTVs are for first mortgages, however, and do not take into account "piggyback" seconds. The MBA estimates that 22% of purchase mortgages had piggybacks in 2005.

The MBA's own mortgage origination survey also finds that credit scores have remained stable, with about half of loans originated in the first half of last year going to borrowers with FICO scores above 700. About three quarters had FICO scores above 650.

Still, MBA chief economist Doug Duncan expects overall delinquency rates to rise in the near term, in part reflecting slower home price appreciation, the seasoning of outstanding loans and a growing share of subprime credit in the MDO universe. (See related story, page 2.)

One test of the market will be the performance of the estimated $1.1 trillion to $1.5 trillion of ARMs that are expected to see rate resets in 2007.

"Our sense is that $600 billion to $700 billion of that will refinance," Mr. Duncan told Mortgage Servicing News.

About $300 billion to $400 billion of the resetting ARMs consists of subprime quality loans that have not reset earlier and the performance of these loans will be a test of the market, he said, noting that it is a relatively small percentage of loans outstanding.

He expects overall delinquency rates to peak late this year or possibly in the first half of 2008 before credit quality begins to improve overall.

Where problems do arise in credit quality, they may be most concentrated in loan products where borrowers "didn't have any skin in the game," he said. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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