Subprime Mortgage Market: Behavior

Transcription

1 Recent Developments in the Subprime Mortgage Market: Understanding di Consumer Behavior William Apgar Remodeling Futures Conference April 10,

2 Foreclosures on the Rise Assessing Root Causes Looking Forward Thinking Clearly Examining Policy Options

3 Foreclosures on the Rise

4 Serious Mortgage Delinquencies Accelerate Perc cent Prime Sub Prime FHA 1998Q4 1999Q4 2000Q4 2001Q4 2002Q4 2003Q4 2004Q4 2005Q4 2006Q4 Note: Serious delinquencies i combine loans that t are 90 days past due and loans in foreclosure.

5 As Overall Lending Eases Back, Non-Prime Lending Advances Year Total Loans (Billions) Non-Prime Loans (Billions) Share of Non-Prime % % % , % , % , % , % 8.4% , % , % , % , % , % Source: Inside Mortgage Finance, The 2007 Mortgage Market Statistical Annual.

6 As Affordability Mortgage Products Gained in Popularity, Their Delinquency Rate Rose Sharply al Originations Share of Tot Day Delin nquency Rate (% 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q Interest Only Negative Amortization 60+ Day Delinquency Rate Source: First American LoanPerformance. Note: Affordability products include interest-only and negative-amortization loans.

7 Assessing Root Causes

8 The Ability of Consumers to Make Informed Choices is Limitedit Behavioral economic analysis and market research suggests that consumers often make choices that may not be in their best interests and that they may later regret.

9 Consumers are Vulnerable to Push Marketing Mortgage sales and marketing efforts may exploit various consumer decision making weaknesses. In particular, some mortgage brokers, retail loan officers, and lending organizations use their knowledge of consumer decision making tendencies to aggressively market specific mortgage products that are not in the best interests of the borrower.

10 Mortgage Market Structure Creates Challenges The tendency to deploy aggressive marketing and sales techniques is reinforced by the structure of the mortgage industry, particularly l the wide spread use of targeted incentives designed to encourage mortgage brokers and loan officers to convince consumers to select specific and often higher-priced mortgage products.

11 Broker Share of Non-prime Lending Grows, While Retail Share of Non-prime Shrinks 100% 80% 60% 40% 20% 0% Prime Broker Correspondent Retail Non-Prime Source: Inside Mortgage Finance, The 2006 Mortgage Market Statistical Annual.

12 Access to Good Loans Proves Elusive As a result of the current market structure, consumers often fail to obtain a good loan product, where: The consumer understands both the advantages and risks associated with a loan product The loan is priced in a manner consistent with the underlying loan risks and costs The loan choice reflects both the short- and long-run interests of the borrower Borrowers have a reasonable prospect of being able to repay the loan

13 Looking Forward Thinking Clearly

14 Foreclosure Likely to Increase Over Near Term With mortgage rates on the rise, home price appreciation softening and larger shares of households holding high loan-to-value, adjustable rate mortgages, the foreclosure boom has yet to run its course.

15 Subprime Loans Originated in 2006 Are Off to a Very Poor Start Share of Subprime Loans 60+ Days Delinquent or in Foreclosure by Origination Year 12 Six Months After Origination Twelve Months After Origination Fixed Adjustable Fixed Adjustable Source: First American LoanPerformance.

16 ES-3: The Wave of Non-Prime Mortgages Hitting Interest Rate Resets is Only a Small Fraction of Total Home Debt Outstanding Estimated Current Non-Prime Adjustable Mortgage Debt Expected to Reset unt (Billions) Reset Amo $40 $35 $30 $25 $20 $15 $10 $5 $ of Mortgage Dec-0 06 set as a Share tanding (%) Jan-0 07 e Estimated Res Debt Outst Feb-0 07 Mar-0 07 Apr-0 07 May-0 07 Jun-0 07 Jul-0 07 Aug-0 07 Sep-0 07 Oct-0 07 Nov-0 07 Dec-0 07 Jan-0 08 Feb-0 08 Mar-0 08 Apr-0 08 May-0 08 Jun-0 08 Jul-0 08 Aug-0 08 Sep-0 08 Oct-0 08 Nov-0 08 Dec-0 08 Cumulative SubPrime Alt-A Option ARM Share of Outstanding Mortgage Debt Note: Non-prime are subprime and Alt-A A loans. Excludes unsecuritized adjustable rate loans that may also be non-prime. Source: Credit Suisse.

17 Substantial Restructuring of Subprime Sector Will Continue Unable to meet their obligations to investors to repurchase failed loans, many non prime lenders face serious liquidity idit problems/bankruptcy. Others are pulling back from subprime lending to reduce their exposure to future loan losses and/or limit reputational risk.

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19 Data Problems Abound Lack of consistent and readily available data on the characteristics of mortgage loans, loan performance and foreclosure outcomes limits i the ability of policy makers and industry analysts alike to asses likely causes, and consequences of the current foreclosure boom.

20 Data for Individual Metropolitan Areas Particularly Difficult to Assemble Metropolitan Area Loan Performance Foreclosures Per Household Rank RealtyTrac Foreclosures Per Household Rank Akron, OH 0.71% 4 NA NA Atlanta, GA 0.52% % 2 Cleveland-Lorain-Elyria, OH 1.00% % 14 Dallas, TX 0.41% % 3 Dayton-Springfield, OH 0.70% % 16 Denver, CO 0.44% % 5 Indianapolis, IN 0.84% % 1 Memphis, TN-AR-MS 0.44% % 4 Youngstown-Warren, OH 0.76% % 23 Source: Abt Associates Identifying Foreclosure Hotspots: Recommended Approaches and Roles for The Center for Foreclosure Solutions.

21 Examining Policy Options

22 Regulatory Response Is Likely While efforts to modernize e regulations on mortgage lending are long overdue, there is legitimate concern that poorly crafted regulations could make matters worse.

23 Mortgage Channels Matter Funding for higher-priced mortgages, as opposed to lower-priced mortgages, g flows through distinct channels linking investors to borrowers. Individual mortgage channels differentially serve specific metropolitan areas, neighborhoods, and racial and ethnic subgroups.

24 Regulatory Systems Differ Across Channels Higher-priced loans are more likely to flow through less regulated channels. Consequently, mortgages made in individual metropolitan areas, neighborhoods are subject to differing degrees of regulatory oversight.

25 Lack of Uniformity i of Regulations is Inherently Unfair Under the existing federal regulatory framework, higher-priced loans flow through mortgage g channels that are subject to the least extensive regulatory scrutiny. As a result, the most vulnerable borrowers are less likely to benefit from federally mandated consumer protections that are more widely present in the lower-priced prime market.

26 Larger Independent Mortgage Bankers Account for Most of the Lending of Higher-Priced Loan Specialists Percent Distribution Higher-Price Specialized Lenders Size of Lender (By Number of Loans) Less than 10, ,000 More than 75,000 All Lenders Credit Unions CRA-Regulated Lenders Assessment Area Lenders Outside Assessment Area Independent d Mortgage Banker All Lower-Price Specialized Lenders Size of Lender (By Number of Loans) Less than 10, ,000 More than 75,000 All Lenders Credit Unions CRA-Regulated Lenders Assessment Area Lenders Outside Assessment Area Independent Mortgage Banker All Note: For higher-prices specialized lenders, higher-prices loans account for more than 50% of all lending; for lower-priced lenders, lower-priced loans account for less than 3% of all lending. Source: JCHS enhanced HMDA database.

27 Lack of Uniformity Can Distort Market Solutions to existing industry problems whether they be regulatory or market driven must be applied in a uniform manner to all mortgage market segments. Absent that, some will continue to use questionable practices to gain competitive advantage.

28 Collective Action Needed to Eliminate Low Roaders To eliminate low roader practices, the industry must have the will and the mechanisms in place to sanction or otherwise force out of the market those participants p unwilling to adhere to industry best practices.

29 Develop Enhanced Point of Sale Consumer Assistance Move beyond consumer counseling, and Create a trusted advisor network Build a second opinion hotline Develop an automated loan pricing guide Help consumers opt-into good loans Extend disclosure time lines to promote shopping

30 Expand Interagency Guidance to Non- Banks Federal regulators should either use existing authority or seek new legislation that would enable them to extend the provisions of the recently enacted Interagency Guidance to all lenders, including non-banks.

31 Create More Uniform Oversight of Secondary Market Participants Today, most funding for non-prime loans flows through less regulated non-gse channels. Efforts to strengthen SEC monitoring and oversight activities are important, as are efforts to encourage the GSEs to expand their purchases of non-prime whole loans.