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The highest-quality loans are called prime or conforming, terms that are used interchangeably, though they don't have quite the same meaning: conforming describes a loan that meets Fannie Mae and Freddie Mac guidelines and is typically sold to these GSEs. It can't exceed $417,000 (except in certain high-cost areas, where the limit is

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  • Conforming, FHA/VA
  • Jumbo S Alt-A
  • Subprime [3 Seconds

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Figure 4.1 Mortgage Origination Volume by Product Type

Source: Inside Mortgage Finance, Inside Mortgage Finance Publications, Inc. Copyright 2009. Reprinted with permission.

- Alt-A Option ARMs

- Jumbo

- Subprime

- Prime

■ Home Equity Lines of Credit

- Alt-A Option ARMs

- Jumbo

- Subprime

- Prime

■ Home Equity Lines of Credit

200%

ci a (S a ci a d a ci a d a ci a ci a ci a ci o-Figure 4.2 Mortgage Delinquencies and Foreclosures by Product Type.

Source: Amherst Securities, LoanPerformance; National Delinquency Survey, Mortgage Bankers Association; FDIC Quarterly Banking Profile; T2 Partners estimates.

Note: Home Equity Lines of Credit are 90+ days delinquent. Prime is seasonally adjusted.

200%

ci a (S a ci a d a ci a d a ci a ci a ci a ci o-Figure 4.2 Mortgage Delinquencies and Foreclosures by Product Type.

Source: Amherst Securities, LoanPerformance; National Delinquency Survey, Mortgage Bankers Association; FDIC Quarterly Banking Profile; T2 Partners estimates.

Note: Home Equity Lines of Credit are 90+ days delinquent. Prime is seasonally adjusted.

$729,750) and the borrower must make a substantial down payment and have a good credit history (usually a FICO score above 740).

As shown in Figure 4.3, conforming loans that went to Fannie and Freddie peaked at 62 percent of the market in 2003 but then declined to only 33 percent in 2006 as Wall Street ramped up its purchases of nonconforming loans, especially subprime and Alt-A.

Overall, the delinquency rate for prime loans is quite low, but has quadrupled from 1 percent to 4 percent in the past two years, as shown in Figure 4.4.

Lending standards for even prime loans deteriorated at the peak of the bubble in 2006 and early 2007, leading to delinquency and default rates far above historical norms for those two years. Figure 4.5 shows Fannie Mae 's single-family cumulative default rate (meaning the loan was "terminated without full satisfaction").

For each type of loan, we are using vintage charts like this one, so allow us a moment to explain: Rather than show the total delinquency rate over time for all loans of a certain type, these charts show the delinquency

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Figure 4.3 Conforming Mortgage Origination Volume

Source: Inside Mortgage Finance, published by Inside Mortgage Finance Publications, Inc. Copyright 2009. Reprinted with permission.

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Figure 4.4 Prime Mortgage Delinquency Rate

Source: National Delinquency Survey, Mortgage Bankers Association. Note: Seasonally adjusted.

Months of Seasoning

Figure 4.5 Single-Family Cumulative Default Rate by Vintage

Source: Fannie Mae 2008 Credit Supplement (February 26, 2009), T2 Partners estimates.

Note: The delinquency rate for all prime mortgages by vintage was unavailable, so we use Fannie Mae data as a reasonable proxy.

Months of Seasoning

Figure 4.5 Single-Family Cumulative Default Rate by Vintage

Source: Fannie Mae 2008 Credit Supplement (February 26, 2009), T2 Partners estimates.

Note: The delinquency rate for all prime mortgages by vintage was unavailable, so we use Fannie Mae data as a reasonable proxy.

rate for loans written during each year, based on how many months elapsed from the time the loans were written. Thus, Figure 4.5 shows that after two years (24 months) of seasoning, only 8 basis points (0.08 percent) of Fannie Mae 's prime loans written in 2003 had defaulted. But as lending standards increasingly collapsed in subsequent years, the defaults soar: 8 basis points after two years for 2003 vintage loans, 14 basis points for 2004, 18 basis points for 2005, 38 basis points for 2006, and a horrifying 80 basis points for 2007.

While the default and loss rates for higher-quality prime loans will be much lower than other types, the amount of these loans outstanding, roughly $4.5 trillion, dwarfs that of other types, so even a low percentage loss rate—we estimate 5 to 10 percent—translates into big dollars.

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