Descriptive Analysis

In this paper we use and analyze a loan-level database that covers more than half of the U.S. subprime mortgage market.6 There is no consensus on the exact definition of a subprime mortgage loan. The term subprime can be used to describe certain characteristics of the borrower (e.g., a FICO credit score less than 620),7 lender (e.g., specialization in high-cost loans),8 security of which the loan can become a part (e.g., high projected default rate for the pool of underlying loans), or mortgage contract type (e.g., no money down and no documentation provided). The common element across definitions of a subprime loan is a high default risk. In this paper, subprime loans are those underlying subprime securities. We do not include less-risky Alt-A mortgage loans in our analysis. We focus on first-lien loans and consider the 2001 through 2007 sample period.

We first discuss the main characteristics of the loans in our database at origination. Second, we discuss the delinquency and foreclosure rates of these loans for various segments of the subprime mortgage market.

2.1 Loan Characteristics at Origination

Table 1 provides the descriptive statistics for the subprime mortgage loans in our database that were originated between 2001 and 2006. The subprime mortgage market grew dramatically over this period. In the first block of Table 1 we see that over the sample period, the annual number of originated loans more than quadrupled and the average loan size almost doubled. The total dollar amount originated in 2001 was $94 billion. By 2006, originations had increased more than seven-fold, to $685 billion.

6We use the First American LoanPerformance database, which contains about 85 percent of all securitized subprime mortgages. Mortgage Market Statistical Annual (2007) reports securitization shares of subprime mortgages each year from 2001 to 2006 equal to 54, 63, 61, 76, 76, and 75 percent respectively.

7The Board of Governors of the Federal Reserve System, The Office of the Controller of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision use this definition.

8The U.S. Department of Housing and Urban Development uses HMDA data and interviews lenders to identify subprime lenders among them. There are, however, some subprime lenders making prime loans and some prime lenders originating subprime loans.

Table 1: Loan Characteristics at Origination for Different Vintages

Descriptive statistics for the first-lien subprime loans in the LoanPerformance database. We do not report other mortgage types, which amount to less than 0.1%.

2001

2002

2003

2004

2005

2006

Size

Number of Loans (*1000)

624

974

1676

2743

3440

2646

Average Loan Size (*$1000)

151

168

180

201

234

259

Mortgage Type

FRM (%)

41.4

39.9

43.3

28.2

25.1

26.1

ARM (%)

0.9

1.9

1.3

4.3

10.3

12.8

Hybrid (%)

52.2

55.9

54.7

67.3

62.0

46.2

Balloon (%)

5.5

2.2

0.8

0.2

2.6

14.9

Loan Purpose

Purchase (%)

35.1

33.9

32.9

42.0

45.7

45.4

Refinancing (cash out) (%)

52.1

51.2

51.6

47.9

45.7

44.8

Refinancing (no cash out) (%)

12.3

14.6

15.1

10.0

8.6

9.8

Variable Means

FICO Score

620.1

630.5

641.4

645.9

653.7

654.7

Combined Loan-to-Value Ratio (%)

80.0

79.9

80.6

82.8

83.5

84.4

Debt-to-Income Ratio (%)

37.8

38.1

38.2

38.5

39.1

39.8

Missing Debt-to-Income Ratio Dummy (%)

41.6

44.1

38.3

35.1

39.2

31.7

Investor Dummy (%)

10.0

12.0

14.0

14.0

15.0

15.0

Documentation Dummy (%)

68.5

63.4

59.8

57.2

51.8

44.7

Prepayment Penalty Dummy (%)

66.3

63.8

61.4

60.1

60.6

61.6

Mortgage Rate (%)

9.4

8.3

7.3

6.7

6.6

7.2

Margin for ARM and Hybrid Mortgage Loans (%)

6.2

6.3

5.9

5.3

5.0

4.9

In the second block of Table 1, we split the pool of mortgages into four main mortgage contract types. Most numerous are the hybrid mortgages, accounting for about half of all our subprime loans. A hybrid mortgage carries a fixed rate for an initial period (typically 2 or 3 years) and then the rate resets to a reference rate (often the 6-month LIBOR) plus a margin. The fixed-rate mortgage contract has become less popular in the subprime market over time and accounted for just 26 percent of the total number of loans in 2006. In contrast, in the prime mortgage market, most mortgage loans are of the fixed-rate type.9 The proportion of balloon mortgage contracts jumped substantially in 2006, and accounted for 15 percent of the total number of mortgages originated that year. A balloon mortgage does not fully amortize over the term of the loan and therefore requires a large final (balloon) payment. About 13 percent of the mortgages originated in 2006 were adjustable-rate (non-hybrid) mortgages.

In the third block of Table 1, we report the purpose of the mortgage loans. In about 30 to 45 percent of cases, the purpose is to finance the purchase of a house. Approximately 50 percent of our subprime mortgage loans were originated to extract cash, by refinancing an existing mortgage loan into a larger new mortgage loan. Cash-out refinancing loans were particularly prevalent between 2001 and 2003. The share of loans originated in order to refinance with no cash extraction is relatively small.

In the final block of Table 1, we report the mean values for the variables that we will use in the regression analysis (see Table 2 for a definition of these variables). The average FICO credit score actually rose over the sample period. The combined loan-to-value (CLTV) ratio, which measures the value of all-lien loans divided by the value of the house, slightly increased over time, primarily because of the increased popularity of second-lien and third-lien loans. The (back-end) debt-to-income ratio (if provided) and the fraction of loans with a prepayment penalty were fairly constant. For about a third of the loans in our database, no debt-to-income ratio was provided; this is captured by the missing debt-to-income ratio dummy variable. The share of loans with full documentation fell sharply over the sample period, from 69 percent in 2001 to 45 percent in 2006.

The mean mortgage rate fell substantially from 2001 to 2004, consistent with sharp declines in both the 1-year and 10-year Treasury yields over the same period. Between 2004 and 2006, both the 1-year and 10-year Treasury yield increased again, but the mortgage rate on subprime mortgages, remarkably, remained fairly constant. Finally, the margin (over a reference rate) for adjustable-rate and hybrid mortgages

9For example Koijen, Van Hemert, and Van Nieuwerburgh (2007) show that the fraction of conventional, single-family, fully amortizing, purchase-money loans reported by the Federal Housing Financing Board in its Monthly Interest Rate Survey that are of the fixed-rate type fluctuated between 60 and 90 percent from 2001 to 2006. Vickery (2007) shows that empirical mortgage choice is affected by the eligibility of the mortgage loan to be purchased by Fannie Mae and Freddie Mac.

declined from 2001 to 2004 and remained fairly constant afterward.

We do not report summary statistics on the loan source, such as whether a mortgage broker intermediated, as the broad classification used in the database rendered this variable less informative.

2.2 Performance of Loans by Market Segments

In Figure 1 we showed that for the subprime mortgage market as a whole, vintage 2006 loans stand out in terms of high delinquency and foreclosure rates (for variable definitions, see Table 2). In Figure 4, we again plot the age pattern in the delinquency rate for vintages 2001 through 2006 and split the subprime mortgage market into various segments. As the figure shows, the poor performance of the 2006 vintage is not confined to a particular segment of the subprime market, but rather reflects a market-wide phenomenon.

In the lower four panels of Figure 4 we see that for purchase-money, cash-out refinancing, low-documentation, and full-documentation mortgage loans, the 2006 vintage shows the highest delinquency rate pattern. In general, vintage 2001 loans show the second-highest delinquency rates, and vintage 2003 loans have the lowest delinquency rates.

In the upper right panel, we see that for adjustable-rate mortgages (ARMs), the 2006 vintage clearly stands out with higher delinquency rates, while 2001 again ranks as the second worst vintage year. In the upper left panel of Figure 4 we see that, in general, the delinquency rate for fixed-rate mortgages (FRMs) is lower than that for ARMs. As with the ARMs in our sample, the delinquency rate for FRMs originated in 2006 is substantially higher than the delinquency rates of the loans originated between 2001 and 2005.

In Figure 5 we plot the delinquency and foreclosure rates of all outstanding mortgages. Notice that the fraction of FRMs that are delinquent or in foreclosure remained fairly constant at about five percent from 2005 on. These rates are consistent with those used in an August 2007 speech by the Chairman of the Federal Reserve System (Bernanke (2007)), who said "For subprime mortgages with fixed rather than variable rates, for example, serious delinquencies have been fairly stable at about 5-1/2 percent." It is important, though, to realize that this result is driven by an aging effect of the FRM pool, caused by a recent decrease in the popularity of FRMs (see Table 1). In other words, FRMs originated in 2006 in fact performed unusually poorly (Figure 4, upper-left Panel), but if one plots the delinquency rate of outstanding FRMs over time (Figure 5, left Panel), the weaker performance of vintage 2006 loans is masked by the aging of the overall FRM pool.

Figure 4: Actual Delinquency Rate for Segments of the Subprime Mortgage Market

The figure shows the age pattern in delinquency rate for the different vintages. Each of the six panels focuses on a different segment of the subprime mortgage market.

Fixed-Rate Mortgage Loans

Adjustable-Rate Mortgage Loans

Fixed-Rate Mortgage Loans

2 4 6 8 10 12 14 16 18 20 22 24 Age (Months)

jfi 16-ro

0i 14-1

3 10

2006 2005 2004 2003 2002 2001

Adjustable-Rate Mortgage Loans

2006 2005 2004 2003 2002 2001

18 20 22 24

2468

10 12 14 16 Age (Months)

18 20 22 24

Purchase-Money Mortgage Loans

Cash-Out Refinancing Morgage Loans

20 18

Purchase-Money Mortgage Loans

20 18

Age (Months)

jB 16 ra

Qi 14

3 10

"TO

2006 2005 2004 2003 2002 2001

—i—1—i—1—i—1—r—

Age (Months)

Low-or-No-Doc Mortgage Loans

Full-Documentation Mortgage Loans

Low-or-No-Doc Mortgage Loans

0i 14

Age (Months)

20-1 1i

0i 14

2006 2005 2004 2003 2002 2001

—i—1—i—1—i—1—r—

Age (Months)

Figure 5: Actual Delinquency and Foreclosure Rates of Outstanding Mortgages

The Figure shows the actual delinquency and foreclosure rates of all outstanding FRMs and hybrids from January 2000 through September 2007.

Actual Delinquency Rate (%)

Actual Foreclosure Rate (%)

20-f

Actual Delinquency Rate (%)

20-f

2000 2001 2002 2003 2004 2005 2006 2007 Year

Actual Foreclosure Rate (%)

2000 2001 2002 2003 2004 2005 2006 2007 Year
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Responses

  • linda
    What percentage of the mortgage market became sub prime in 2002/2003?
    7 years ago

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