More Subprime Defaults In West Coast & Florida

Subprime defaults are rising nationwide and they are no longer contained in states experiencing job losses and other economic problems.

Until recently, subprime defaults were concentrated in the Rust Belt states and the hurricane-affected states, principally Louisiana and Mississippi.

"We are beginning to see rapid growth on the West Coast and Florida," Office of Federal Housing Enterprise Oversight director James Lockhart said last week.

Researchers at Friedman Billings Ramsey recently reported that the subprime default rate in Florida hit 7.9% in January, up from 4% in January 2006, or 100%. In California, the default rate hit 8.3% in January, up from 2.3% in January 2006, or 260%.

That is still below the national subprime default rate, which was 10.5% in January, according to FBR research director Michael Youngblood.

[Defaults include loans 90 days or more past due, in foreclosure and real estate-owned.]

But California and Florida are not the only states experiencing a significant increase in defaults, Mr. Youngblood said. "We see elevated levels of defaults in every market."

He blames the wave of defaults on the liberal underwriting in 2006 when first-time homeowners with given stated-income loans and 100% financing via piggyback seconds.

That failed underwriting experiment has elevated defaults above economic fundamentals, the FBR managing director said.

And it has forced the researchers at the Arlington, Va.-based investment banking firm to revise their forecast that subprime defaults would crest before hitting 11%.

"We expect default rates to drift up to 11.4% by November and slip slightly lower in January 2008 back down to 10.5%. Then we will see an ebbing of default rates," Mr. Youngblood said in an interview.

He stressed, however, that this outlook is contingent on job growth continuing at 100,000-plus a month, no increase in interest rates by the Federal Reserve and the implementation of tighter underwriting standards on subprime loans.

He noted that consolidation and bankruptcy has eliminated the weakest subprime lenders and the federal banking regulators are close to finalizing subprime underwriting guidance.

So he expects the adoption of prudent underwriting standards will precipitate a decline in defaults by the end of the year.

"By the end of this quarter, we should start to see the first pools consisting entirely of loans underwritten to the new standards," 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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