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...But Subprime Problems Persist

Default rates on subprime loans are rising as poor job markets in the Midwest and New England have taken their toll on loan performance while default rates in the hurricane-impacted states remain at elevated levels. In addition, newly originated subprime loans are exhibiting especially high early default rates.

Default rates on subprime mortgage-backed securities jumped from 6.9% in June to 9.1% in October, according to researchers at Friedman Billings Ramsey.

Many Midwestern cities are still feeling the effects of layoffs by automobile manufacturers and parts suppliers over the past two years. In Detroit, defaults have increased from 15% in October 2005 to 22% as of Oct. 30, 2006.

Meanwhile, default rates in New England have surged. Boston has seen default rates jump from 5.9% in October 2005 to 11.7% in October of last year.

"Job growth went to zero in 2005 and did not rebound," said FBR managing director Michael Youngblood. So the increase in defaults was anticipated, he said. (Default rates include loans that are 90 days or more past due, foreclosures and real estate-owned.)

What is "surprising" is that default rates in the Gulf Coast states, which are still recovering from the 2005 hurricanes, have to come down further, Mr. Youngblood said.

The subprime default rate in New Orleans was 9% in August 2005 just before Hurricane Katrina hit and flooded the city. It jumped to 49% by December 2005 and crested. After trending down to 23.4% in September, the improvement seems to have stalled out.

"The prolonged elevated rates of default in the hurricane cities are a surprise to me and everyone else," Mr. Youngblood said. "I had expected it to be significantly lower given the massive assistance" the region has received.

Meanwhile, the performance of adjustable-rate subprime mortgages originated in 2006 is not keeping a damper on default rates either.

This book of business is rapidly deteriorating and "higher default and loss rates may ensue," a recent FBR research report warns.

The default rate on 2006 subprime ARMs jumped 27% in the month of November to 3.21%, while the default rate on similar loans originated in 2005 hit 6.49%.

"It appears that subprime lenders may have mended their tattered profitability in 2006 by originating loans with higher mortgage rates, perhaps to riskier borrowers," the FBR report says.

The FBR managing director noted it will take another 90 days before he gets a complete picture of the credit characteristics of the 2006 book of business.

"But looking at data from the first three quarters, 2005 is proving to be an average year and 2006 is proving to be a worse-than-average year," Mr. Youngblood said. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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