Interesting article in National Mortgage News regarding prediticing strategic mortgage defaults.
http://www.nationalmortgagenews.com/dailybriefing/2010_332/fico-improves-way-1024457-1.html
FICO launched an analytic advance that substantially improves lenders’ ability to identify borrowers at risk of strategic default on mortgages.
The analytics provider is now consulting with mortgage lenders to offer custom analytic solutions for their mortgage portfolios. This would allow these originators to take preventative action and limit the costly effect of strategic defaults.
A strategic default is when a borrower who has the capacity to make mortgage payments chooses to default, usually because the property value is less than the mortgage’s outstanding principal.
Lenders have traditionally utilized the degree of home price depreciation to predict strategic defaults. However, new FICO Labs research showed that borrowers whose homes have lost the most value are only two times as likely to default as those whose houses have lost the least value. By using custom analytic models, FICO Labs researchers have shown the ability to identify borrowers who are over 100 times more probable to strategically default versus others.
Additionally, FICO Labs researchers have also found that strategic defaulters as a group are usually more savvy managers of their credit compared with the general population, with higher FICO scores, lower revolving balances, fewer instances of exceeding limits on their credit cards and lower retail credit card usage. This means that strategic defaulters have shown a different type of credit behavior versus distressed consumers who miss payments.
“Mortgage payment patterns have shifted, and some borrowers are intentionally defaulting on their mortgages because they believe it is in their best financial interest, and because they believe the consequences will be minimal,” said Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs.
“Before mortgage servicers can work effectively with potential strategic defaulters, they must first be able to identify them. Our new research shows it is possible for servicers to find those at greatest risk of strategic default, both to prevent losses and to prevent borrowers from making a decision that will damage their credit future.”
Experts said that the persisting mortgage sector weakness is driving more strategic defaults. Studies from the University of Chicago Booth School of Business showed that in September 2010, 35% of mortgage defaults were strategic, increasing from 26% in March 2009.
Meanwhile, CoreLogic's March 2011 study showed that the number of residential mortgages with negative equity totaled 11.1 million in 4Q10, or 23.1% of all residential mortgages in the U.S., rising from 22.5% in 3Q10.
The FICO Labs team built strategic default analytics that test the ability to rank-order both current and delinquent borrowers in terms of their likelihood of strategically defaulting on their mortgage. These custom models separated borrowers into high versus low strategic default risk bands. Among current borrowers (i.e., those not delinquent on any loans):
The riskiest borrowers are 110 times more likely to strategically default versus the least risky borrowers. The riskiest 20% of borrowers comprised 67% of those who later committed a strategic default. In short, FICO said that a servicer could reach two-thirds of those who would commit strategic default by focusing on just 20% of its borrowers.
“The ability to spot likely strategic defaulters before delinquency enables servicers to intervene early,” Jennings said. “Strategic defaults are bad for lenders and investors, they’re bad for the homeowners who elect to default, and they’re bad for neighborhoods and cities. Preventing them is in the interests of everyone involved.”
By Structured Finance News Staff
Monday, April 25, 2011
Thursday, April 21, 2011
Mortgage rule could hurt borrowers: FHA's Ryan
By Corbett B. Daly
http://www.reuters.com/article/2011/04/13/us-usa-housing-mortgages-idUSTRE73C7NC20110413
WASHINGTON Wed Apr 13, 2011 5:46pm EDT
WASHINGTON (Reuters) - A proposed rule requiring a minimum 20 percent down payment on mortgages that lenders could then sell to investors without keeping some of the risk on their books might prevent some potential borrowers from getting a loan, a top U.S. housing official said.
While the rule "is designed to create a class of loans that have a lower likelihood of default, in its proposed definition it has the potential to exclude a number of buyers," Acting Federal Housing Administration Commissioner Bob Ryan said in prepared testimony.
Ryan is to deliver his remarks Thursday to a House Financial Services Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises. They were posted on the panel's website on Wednesday.
The Federal Deposit Insurance Corp and the Federal Reserve a few weeks ago endorsed the "qualified residential mortgage" proposal that is intended to restore lending discipline and define the safest form of mortgages that can be completely resold to other investors.
Loans backed by mortgage finance giants Fannie Mae and Freddie Mac and the Federal Housing Administration are exempt from the rule. Together they back almost nine in 10 new mortgages.
Last year's rewrite of the rules of Wall Street requires firms that package loans into securities -- a practice known as securitization -- to keep at least 5 percent of the credit risk on their books.
The provision is meant to force securitizers to have "skin in the game," so they don't churn out poorly underwritten loans and then pass along the risk to investors, as happened during the 2007-2009 financial crisis.
Mortgages that meet strict underwriting standards, known as qualified residential mortgages or QRMs, are exempt from the risk requirement.
"Given the exigencies of strong underwriting for healthy, sustainable mortgages, we must be mindful of the trade-off presented by the current definition of QRM between improvement in loan quality and affordability and accessibility for prospective homebuyers," said Ryan.
He said down payment requirements alone are not the best predictors of whether loans will perform. The combination of credit scores and down payments is a better predictor of loan performance, he said.
The agencies are currently accepting comments on the proposed rule. A final rule is expected later this year.
http://www.reuters.com/article/2011/04/13/us-usa-housing-mortgages-idUSTRE73C7NC20110413
WASHINGTON Wed Apr 13, 2011 5:46pm EDT
WASHINGTON (Reuters) - A proposed rule requiring a minimum 20 percent down payment on mortgages that lenders could then sell to investors without keeping some of the risk on their books might prevent some potential borrowers from getting a loan, a top U.S. housing official said.
While the rule "is designed to create a class of loans that have a lower likelihood of default, in its proposed definition it has the potential to exclude a number of buyers," Acting Federal Housing Administration Commissioner Bob Ryan said in prepared testimony.
Ryan is to deliver his remarks Thursday to a House Financial Services Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises. They were posted on the panel's website on Wednesday.
The Federal Deposit Insurance Corp and the Federal Reserve a few weeks ago endorsed the "qualified residential mortgage" proposal that is intended to restore lending discipline and define the safest form of mortgages that can be completely resold to other investors.
Loans backed by mortgage finance giants Fannie Mae and Freddie Mac and the Federal Housing Administration are exempt from the rule. Together they back almost nine in 10 new mortgages.
Last year's rewrite of the rules of Wall Street requires firms that package loans into securities -- a practice known as securitization -- to keep at least 5 percent of the credit risk on their books.
The provision is meant to force securitizers to have "skin in the game," so they don't churn out poorly underwritten loans and then pass along the risk to investors, as happened during the 2007-2009 financial crisis.
Mortgages that meet strict underwriting standards, known as qualified residential mortgages or QRMs, are exempt from the risk requirement.
"Given the exigencies of strong underwriting for healthy, sustainable mortgages, we must be mindful of the trade-off presented by the current definition of QRM between improvement in loan quality and affordability and accessibility for prospective homebuyers," said Ryan.
He said down payment requirements alone are not the best predictors of whether loans will perform. The combination of credit scores and down payments is a better predictor of loan performance, he said.
The agencies are currently accepting comments on the proposed rule. A final rule is expected later this year.
Fed unveils proposal on mortgage standards
Good article by Dave Clarke of Reuters but I am going to add my comentary about a few points, directed more at the Federal Reserve, not Dave Clarke. These people at the Fed are truly clueless.
"Lenders would be required to make sure prospective borrowers have the ability to repay their mortgages before giving them a loan". Really? Do they think we want to make loans "knowing" the borrowers can't make the payment? Those loans are long gone and so are the lenders that made irresponsible loans.
"lenders could be sued by the borrower if they do not take the proper steps to check a borrowers ability to repay the loan." Anyone who has applied for a mortgage in the past year has NO DOUBT they have been thoroughly checked out, including their DNA.
"is intended to tighten lending standards and combat home lending abuses that contributed to the 2007-2009 financial crisis." If it gets any tighter, be prepared to pay cash for your dream home. Not really, but it seems that way.
Enjoy!
http://www.reuters.com/article/2011/04/19/us-financial-regulation-mortgage-idUSTRE73I49F20110419
WASHINGTON Tue Apr 19, 2011 11:27am EDT
WASHINGTON (Reuters) - Lenders would be required to make sure prospective borrowers have the ability to repay their mortgages before giving them a loan, under a proposal released by the Federal Reserve on Tuesday.
The rule, which is required by the Dodd-Frank financial reform law, is intended to tighten lending standards and combat home lending abuses that contributed to the 2007-2009 financial crisis.
The rule would establish minimum underwriting standards for most mortgages and lenders could be sued by the borrower if they do not take the proper steps to check a borrowers ability to repay the loan.
The law does provide protections from this type of liability if a loan meets the specific standards that are part of a "qualified mortgage."
In its proposal, the Fed is seeking comment on two possible ways of defining a qualified mortgage.
Under the first scenario the loan could not include interest-only payments, a balloon payment and regular payments could not result in the principle of the loan increasing.
Under the alternative, the loan would have to meet all the standards laid out under the first option and meet additional requirements such as having the lender verify a borrower's employment status and debt obligations.
The proposal lays out a general standard for complying with the rule, including verifying a borrowers income, their employment and the amount of debt they have.
Mortgage originators who serve rural and underserved areas would be allowed to give out loans with balloon payments.
"This option is meant to preserve access to credit for consumers located in rural or underserved areas where creditors may originate balloon loans to hedge against interest rate risk for loans held in portfolio," the Fed said in a statement.
The Fed is seeking comments on the proposal through July 22.
The final rule will be implemented by the Consumer Financial Protection Bureau, which opens its doors on July 21.
"Lenders would be required to make sure prospective borrowers have the ability to repay their mortgages before giving them a loan". Really? Do they think we want to make loans "knowing" the borrowers can't make the payment? Those loans are long gone and so are the lenders that made irresponsible loans.
"lenders could be sued by the borrower if they do not take the proper steps to check a borrowers ability to repay the loan." Anyone who has applied for a mortgage in the past year has NO DOUBT they have been thoroughly checked out, including their DNA.
"is intended to tighten lending standards and combat home lending abuses that contributed to the 2007-2009 financial crisis." If it gets any tighter, be prepared to pay cash for your dream home. Not really, but it seems that way.
Enjoy!
http://www.reuters.com/article/2011/04/19/us-financial-regulation-mortgage-idUSTRE73I49F20110419
WASHINGTON Tue Apr 19, 2011 11:27am EDT
WASHINGTON (Reuters) - Lenders would be required to make sure prospective borrowers have the ability to repay their mortgages before giving them a loan, under a proposal released by the Federal Reserve on Tuesday.
The rule, which is required by the Dodd-Frank financial reform law, is intended to tighten lending standards and combat home lending abuses that contributed to the 2007-2009 financial crisis.
The rule would establish minimum underwriting standards for most mortgages and lenders could be sued by the borrower if they do not take the proper steps to check a borrowers ability to repay the loan.
The law does provide protections from this type of liability if a loan meets the specific standards that are part of a "qualified mortgage."
In its proposal, the Fed is seeking comment on two possible ways of defining a qualified mortgage.
Under the first scenario the loan could not include interest-only payments, a balloon payment and regular payments could not result in the principle of the loan increasing.
Under the alternative, the loan would have to meet all the standards laid out under the first option and meet additional requirements such as having the lender verify a borrower's employment status and debt obligations.
The proposal lays out a general standard for complying with the rule, including verifying a borrowers income, their employment and the amount of debt they have.
Mortgage originators who serve rural and underserved areas would be allowed to give out loans with balloon payments.
"This option is meant to preserve access to credit for consumers located in rural or underserved areas where creditors may originate balloon loans to hedge against interest rate risk for loans held in portfolio," the Fed said in a statement.
The Fed is seeking comments on the proposal through July 22.
The final rule will be implemented by the Consumer Financial Protection Bureau, which opens its doors on July 21.
Subscribe to:
Posts (Atom)
