B&C Lenders Struggle with Overdues

There's a reason some borrowers are classified as "subprime" credits, and that reason is all too clear if you look at the delinquency rates experienced by some of the largest specialists in managing those loans.

At Fairbanks Capital, a company that has also been beset by negative publicity regarding alleged loan servicing abuses, almost 29% of loans were delinquent at the end of the second quarter, according to data collected by this newspaper's affiliate, the Quarterly Data Report. The Fairbanks delinquency rate was up seven percentage points from a year earlier.

And Fairbanks is not alone. Homecomings, the servicing arm of GMAC-RFC, reported a 23% delinquency rate. At least seven other specialists in servicing B&C credit quality loans reported delinquency rates in double digits. The Homecomings delinquency rate was little changed from last year's second quarter.

Among lenders that submitted delinquency data to MSN, the average delinquency rate was 14.4%, up from a rate of 12.37% among lenders that shared data with us last year.

By way of comparison, just 3.14% of prime quality, conventional loans were delinquent in the second quarter, according to data compiled by the Mortgage Bankers Association of America.

The good news for subprime servicers is that foreclosure rates, while more than double the foreclosure rate on conventional loans, are less astounding than the overall delinquency rates.

While some lenders, including WMC Mortgage, Homecomings and Saxon, reported foreclosure rates in excess of 4% in this year's second quarter, the industry average was 2.83%. And that was down from a rate of 3.99% a year earlier among lenders participating in the Quarterly Data Report survey.

And prospects for the future performance of B&C loans remain uncertain. While most economic data suggest the economy is strengthening, that has yet to translate into a better job market.

Layoffs remain a widespread problem, especially in the industrial Midwest and parts of the South. In September, jobless claims continued to rise, surprising many economists.

On the bright side, Moody's Investors Service recently reported that pools of subprime home loans that were securitized in 2002 are performing better than earlier vintages at a similar point of loan seasoning.

But with refinancing activity slowing down, lenders may be tempted to open the gates a little wider to maintain lending volume. After previous refinancing booms, credit quality has sometimes slipped as lenders accepted marginal loan applications that might have been rejected in busier times.

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