Delinquencies going up are one thing; but the continued drop in housing prices is having a more ominous effect on many investors, lenders, and insurers, as loss severity creeps upward. Alt-A loss severity, in fact, is now even approaching average severity numbers for subprime across all collateral. Clayton reported that subprime first lien average loss severity increased to 45.80 percent in February, up from 42.56 percent in January; Alt-A first lien average severity rose to 36.66 percent, in contrast.
Loss severity refers to the loss a lender is forced to take during foreclosure, as a percentage of unpaid principal balance.
The swift deterioration in Alt-A mortgages is taking place despite a low level of adjustable-rate Alt-A mortgages actually hitting a reset in the current period. The graph below, from the Clayton report, provides a look at Alt-A reset volume by month — note that very few Alt-A borrowers are staring down a pending reset throughout 2008. Yet they are defaulting in droves anyway.
While non-industry media are incorrectly and inexplicably zeroing in on rate resets as the driver behind the recent spike of Alt-A borrower defaults, most industry experts that have spoken with Housing Wire have suggested that as many as 70 percent of Alt-A loans originated in recent years have been fraudulent.
“It’s fraud [that is] now coming home to roost, higher lending limits or not,” said one source, who asked not to be named. “Rate resets aren’t the problem here, and even if they were, LIBOR is low enough right now that it would ease payment shocks for most borrowers.”
For more information, and to obtain a look at highlights from this month’s report, visit http://www.clayton.com.