John Rebchook is a former Rocky Mountain News reporter with more than 30 years of experience in writing and communications... Riskier mortgages default at a rate nearly three times greater than safer loans, according to a new study released today by the Community Mortgage Banking Project.
The finding makes clear that policymakers should distinguish between traditionally underwritten mortgages and riskier products as the Senate considers requiring across-the-board risk retention legislation that would make homeownership more expensive for millions of Americans, according to the Washington, D.C.-based coalition that represents the interests of independent mortgage companies across the nation. (For a detailed article on risk retention, please visit this link.)
20 million loans examined
The study examined more than 20 million loans made between 2002 and 2008, the study found that riskier mortgages performed 2.9 times worse, as measured by loans that were 90 or more days delinquent. It is the first analysis to measure the difference in default rates between higher risk loans and traditionally underwritten, back-to-basics loans during the recent housing cycle.“I think this report spells out the danger of this legislation better than anything I have seen,” said Peter Lansing, head of Universal Lending, one of the biggest privately held mortgage banking companies in Denver. Universal Lending also is a sponsor of InsideRealEstateNews.
Default rates were consistent across the seven years between the two types of loans, the study found. Qualified mortgages – that is, traditionally underwritten mortgages – performed 2.6 times better prior to the boom in 2002, and 3.25 times better at the peak in 2005. Qualified mortgages performed significantly better in each of the nation’s Top 25 metropolitan areas.
“This study confirmed what has long been suspected,” said James Bennison, Senior Vice President, Strategy & Capital Markets for Genworth Financial’s U.S. mortgage insurance business. “Traditional underwriting standards, including full income documentation and straightforward loan features, yielded dramatically fewer defaults. Policymakers should be looking for ways to encourage liquidity for this type of lending. Unfortunately, the across-the-board risk retention would increase its cost and reduce its availability.”
Senate Banking Committee considers reform
The study was released as the Senate Banking Committee neared markup of financial reform legislation. The committee is expected to consider a proposal to impose across-the-board risk retention requirements for all loans sold in the secondary market. It would require the SEC and the federal banking agencies to issue regulations requiring creditors and issuers of asset-backed securities to retain 10 percent of the credit risk on whole loans and securitizations. The provision would impact both traditionally underwritten mortgages as well as riskier mortgages, imposing additional costs on even the most responsible borrowers using back-to-basics mortgage products.
Glen Corso, managing director of CMPB, said risk retention provisions are a reasonable approach for exotic mortgages that carry higher risks of default. That is not the case, however, for traditionally underwritten mortgage such as the ones offered by community-based mortgage banks, local bankers and credit unions, he said.
“This study demonstrates why Congress should be careful not to impose an arbitrary risk retention requirement on all loans sold in the secondary market,” Corso added. “Across-the-board risk retention will unnecessarily and unfairly raise costs on creditworthy borrowers seeking products that are demonstrably lower risk.”
CMBP has urged the committee to exempt low-risk “qualified mortgages” with strong underwriting and documentation standards and safe product designs.
- To define lower risk, the study examined eight traditional, “back-to-basics”, underwriting criteria that are easy for consumers to understand, easy for lenders to apply, and easy for regulators to supervise. Qualified mortgages were those that included all eight of the following factors: Total debt-to-income ratio, including housing and other obligations, of 41 percent or less.
- Fixed rate loans and ARMs with initial rates locked in for 7 years or more.
- Repayment periods of 30 years or less.
- No balloon payments. No interest-only features.
- No negative-amortization features.
- Full income documentation of borrowers’ income and assets.
- Mortgage insurance required if the original loan-to-value ratio was greater than 80 percent.
The study was conducted for Genworth Financial, Inc., in collaboration with CMBP, by Vertical Capitol Solutions of New York, which provides independent valuation and advisory services.
Contact John Rebchook at JRCHOOK@gmail.com.
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