1). Nonprime Loan Performance Deteriorated through the End of 2009 and Varied by Market Segment, Product Type, Cohort Year, and Location

		The Worsening Performance of Nonprime Loans Was Reflected in Increases in Serious Delinquencies

As of December 31, 2009, 63 percent of the 14.50 million nonprime loans  originated from 2000 through 2007 (the last year in which substantial  numbers of nonprime mortgages were made) was no longer active. 2). 3). By  comparison, the number of active nonprime loans in the foreclosure  process grew in the first two quarters of the year, held almost steady in the  third quarter, and declined in the last quarter of 2009. In addition, among all nonprime loans originated from 2000 through 2007,  the cumulative percentage that had completed the foreclosure process  increased from 10 percent at the end of 2008 to 13 percent at the end of  2009. However, Alt-A loans accounted for 55 percent (152,000) of the 277,000  year-over-year increase in the number of seriously delinquent loans. As we stated in a previous report, serious delinquency  rates were higher for certain adjustable-rate products common in the  subprime and Alt-A market segments than they were for fixed-rate  products or the market as a whole. House Price Changes and Certain Loan and Borrower Characteristics Were Associated with Default Rates

House price changes and loan and borrower characteristics, such as loan  amount, combined LTV (CLTV) ratio, and borrower credit score, were  among the variables that we found influenced the likelihood of default on  nonprime loans originated from 2004 through 2006, the peak years of  nonprime mortgage lending. In addition, nonprime loans that lacked full  documentation of borrower income and assets were associated with  increased default probabilities, and the influence of borrowers’ reported  income varied by product type, loan purpose, and the level of  documentation. For purchase loans in particular, borrower race and  ethnicity were associated with the probability of default. However, these  associations should be interpreted with caution because we lack data on  factors—such as borrower wealth, first-time homebuyer status, and  employment status—that may influence default rates and that may also be  associated with race and ethnicity. We found that documentation of borrower  income and assets influenced the probability of default of nonprime loans  originated from 2004 through 2006. 12). Existing sources of data on nonprime  mortgages contain a range of information to support these different uses. While these data sources currently offer some similar data elements, the  sources vary in their coverage of loan, property, and borrower attributes. RealtyTrac offers data on the number of properties in  some stage of the foreclosure process but not data on all active loans. First, the data sources generally  lack information on certain attributes that could help inform policy  decisions or regulatory efforts to mitigate risk, including the following:    Loan attributes: Although three of the five nonprime data sources provide  information on the initial interest rates of the mortgages (and, in some  cases, how those interest rates can change over the life of the loan), they  do not provide information on other mortgage costs, such as points and  fees paid at loan closing. For example, first-time homebuyers are not  directly identified in any of the nonprime data sources, limiting the ability  of analysts to compare the marginal effect of prior homeownership  experience on default probabilities. Ongoing Federal Efforts May Address Some Constraints in Mortgage Data Sources

Ongoing federal efforts could provide data on the entire mortgage market  that potentially would not have some of the constraints that we identified  in the existing sources of mortgage data. First, officials from the Board of  Governors of the Federal Reserve System (Federal Reserve Board) and  Freddie Mac are collaborating on a pilot project to develop a publicly  available National Mortgage Database (NMDB). The persistently weak performance of nonprime mortgages suggests that  loan performance problems in the nonprime market will not be resolved  quickly, and underscores the importance of federal efforts to assist  distressed borrowers and prevent a recurrence of the aggressive lending  practices that helped precipitate the foreclosure crisis. The CoreLogic LP database provides extensive information  about the characteristics and performance of securitized nonprime  mortgages.
Why GAO Did This Study

The surge in mortgage foreclosures that began in late 2006 and continues today was initially driven by deterioration in the performance of nonprime (subprime and Alt-A) loans. Nonprime mortgage originations increased dramatically from 2000 through 2006, rising from about 12 percent ($125 billion) of all mortgage originations to about 34 percent ($1 trillion). The nonprime market contracted sharply in mid-2007, partly in response to increasing defaults and foreclosures for these loans. This report (1) provides information on the performance of nonprime loans through December 31, 2009; (2) examines how loan and borrower characteristics and economic conditions influenced the likelihood of default (including foreclosure) of nonprime loans; and (3) describes the features and limitations of primary sources of data on nonprime loan performance and borrower characteristics, and discusses federal government efforts to improve the availability or use of such data. To do this work, GAO analyzed a proprietary database of securitized nonprime loans and Home Mortgage Disclosure Act data, and reviewed information on mortgage data sources maintained by private firms and the federal government.

What GAO Found

The number of active nonprime loans originated from 2000 through 2007 that were seriously delinquent (90 or more days late or in the foreclosure process) increased from 1.1 million at the end of 2008 to 1.4 million at the end of 2009. Serious delinquency rates were higher for certain adjustable-rate products common in the subprime and Alt-A market segments than they were for fixed-rate products. The number of nonprime loans that were 90 or more days late grew throughout 2009, accounting for most of the overall growth in the number of serious delinquencies. By comparison, the number of active loans in the foreclosure process grew in the first half of the year, and then began to decline somewhat. Additionally, 475,000 nonprime mortgages completed the foreclosure process during 2009. The persistently weak performance of nonprime loans suggests that problems in the nonprime market will not be resolved quickly, and underscores the importance of federal efforts to assist distressed borrowers and prevent a recurrence of the aggressive lending practices that helped precipitate the foreclosure crisis. In addition to performance differences between mortgage products, GAO found across product types that house price changes, loan amount, the ratio of the amount of the loan to the value of the home, and borrower credit score were among the variables that influenced the likelihood of default on nonprime loans originated from 2004 through 2006. In addition, loans that lacked full documentation of borrower income and assets were associated with increased default probabilities, and the influence of borrowers' reported income varied with the level of documentation. GAO found that borrower race and ethnicity were associated with the probability of default, particularly for loans used to purchase rather than to refinance a home. However, these associations should be interpreted with caution because GAO lacks data on factors that may influence default rates and that may also be associated with race and ethnicity, such as borrower wealth and first-time homebuyer status. Existing sources of data on nonprime mortgages contain a range of information to support different uses. While these data sources offer some similar elements, they vary in their coverage of loan, property, and borrower attributes. The data sources generally lack information on certain attributes that could help inform policy decisions or regulatory efforts to mitigate risk. For example, first-time homebuyers are not identified in any of the data sources, limiting the ability of analysts to compare the marginal effect of prior homeownership experience on default probabilities. In addition, most of the data sources do not cover the entire nonprime mortgage market. Ongoing federal efforts have the potential to provide data that may not have some of the constraints of the existing sources. For example, officials from the Board of Governors of the Federal Reserve System and Freddie Mac are collaborating on a pilot project to develop a publicly available National Mortgage Database, which would compile data on a representative sample of outstanding mortgages and provide more comprehensive data than are currently available.

What GAO Recommends

GAO makes no recommendations in this report.