Subprime Florida Home Loans: Data Shows Borrowers Defaulting Early, Often
More subprime borrowers are defaulting in the early months of their home Florida home loans, a trend that has led to greater fear among investors and lenders of rising delinquencies and losses.
For more than a year, shareholders in mortgage lenders and investors have worried that the end of the housing boom, along with higher Florida home loan rates, would cause more borrowers to default on their mortgages, resulting in greater bank and investment losses.
But credit quality has held firm, thanks to a still-strong economy and a robust job market. However, in recent months, an increasing number of mortgage lenders catering to borrowers with bad credit are reporting a rise in delinquencies occurring as soon as six months after origination.
Nationally, about 3.5 subprime home loans out of every 10,000 originated between January and June realized a delinquency on their first monthly payment, LoanPerformance reports. By comparison, only one out of every 10,000 subprime loans granted last year had experienced missed payment in their first month.
LoanPerformance’s data also show that so far this year, there has been a 14 percent increase in the amount of subprime lending recipients who have registered at least one missed payment in the first three months after origination. With statistics like that, rising Florida foreclosure rates are seen as being right around the corner, in the eyes of many analysts.
“If those borrowers are finding themselves in trouble very early on, it may give lenders an indication that the underwriting criteria or quality control are not sufficiently tight,” said Damien Weldon of LoanPerformance.
Based on the year-to-date data, the company expects early payment defaults on subprime mortgages are expected to increase this year.
Those early defaults have forced lenders to buy back mortgages already sold to whole-loan acquirers, particularly investment banks that pool and package those loans into asset-backed securities and then sell them to large investors like insurance companies and hedge funds.
The buybacks, in turn, have led lenders to incur losses and set aside more capital in their reserve funds for potential home loan repurchases in the future.
Some investors and analysts view these blips as a sign of weak credit throughout the mortgage industry. With a growing inventory of unsold homes and slowing home prices, some fear that this pattern may only be beginning to manifest itself.
The secondary market, where lenders sell the new home loans they create to manage risk as well as to have more funds available for making mortgages, could also see more pressure from rising delinquencies. A potential decline in wholesale pricing would eat into lenders’ mortgage income.
The subprime mortgage market has grown substantially in recent years, with total subprime loans outstanding representing about 13 percent of total Florida mortgage loans outstanding.
Subprime borrowers, who pay higher rates than prime borrowers due to their weak FICO credit scores (typically lower than 640) or a lack of documentation (see no doc loans) tend to take on more debt and have less disposable income. A typical subprime mortgage represents 80 percent of the house value.
Such highly leveraged borrowers also have a greater tendency to refinance and take cash out when home prices rise. However, when home prices decline, as is now happening in much of the U.S., those borrowers may have fewer choices to tap into their homes’ equity to pay down debt, leading to more defaults on their Florida home loans.
