SUBPRIME MORTGAGE FORECLOSURES:
MOUNTING DEFAULTS DRAINING HOME OWNERSHIP
By Alan M. White and Cathy Lesser Mansfield
May 12, 2000

In the Spring of 2000 Alan M. White of Community Legal Services in Philadelphia, PA and Professor Cathy Lesser Mansfield of Drake University Law School studied serious default and foreclosure rates in the subprime mortgage industry. Professor Mansfield presented their findings to the Department of Housing and Urban Development and Treasury Departments' Joint Task Force on Predatory Mortgage Lending (May, 2000) and to the House Banking Committee (May 2000). The study and its findings are described herein.

I. Description of the Foreclosure study

The foreclosure study, conducted in Spring, 2000, was performed by looking at SEC filings for 16 of the top subprime mortgage servicers and lenders. These 16 subprime lenders were at the time servicing over $150 billion in subprime home equity debt. The 16 lenders were Associates, Aames, Amresco, Contimortgage, Equicredit, Green Tree, IMC/Citifinancial, the Money Store D.C. Inc., New Century, UC Lending, Option One, Advanta, Delta, WMC, Banc One and GE Capital Mortgage Services. These lenders were chosen based on their rankings by National Mortgage News as top subprime lenders, and because some of their default and foreclosure information is publicly available. At the time the study was performed, these 16 lenders were servicing a little less than half of the outstanding subprime home equity debt.

All attempts were made to look at the most recent information available about these 16 lenders. In some cases, the authors of the study were able to find information from the most recent quarter, but in other cases the most recent information was not available, and so the authors used the most current information they could find.

The report was prepared by taking the disclosed figures from the subject lenders' SEC filings and placing them into designated categories on a spreadsheet. The spreadsheet categorized disclosed default and foreclosure information in the following categories:

• number of loans serviced;
• average loan amount;
• 90-day + delinquencies by percentage of loans being serviced, by dollar amount and by number of loans;
• foreclosures by percentage of loans being serviced, by dollar amount and by number of loans;
• loans in bankruptcy by dollar amount, by percentage of loans being serviced, and by number of loans; and
• Real Estate Owned (that is property already foreclosed upon but not resold) by number of loans, by percentage of loans being serviced, and by dollar amount.

Subprime loan services use different formats for disclosing the information contained in the study, so in some cases it was necessary for the authors to deduce the required information from the information provided by the lender in its SEC filings. The spreadsheet indicates where numbers on the spreadsheet are deduced from other disclosed information.

II. General Findings of the Foreclosure Study

The complete findings of the study of 16 of the top subprime mortgage servicers are indicated on a spreadsheet. The study found that of $163,369,070,000 in loans serviced by the studied subprime lenders, approximately 4.65% were in serious delinquency (more than 90 days late), foreclosure, or completed foreclosure. Spreadsheet line 22, column C. In terms of families affected, we estimated that over 72,000 families were included in these numbers. Spreadsheet line 22, column B. By comparison, the default and foreclosure rate on all mortgages for the 4th quarter of 1999 was a much lower 1.54%. Total Defaults Slide Also by comparison, the default and foreclosure rates for higher risk VA loans and FHA loans were also much lower, at 2.27% and 2.57% respectively.

Foreclosures Conv., VA etc. Slide

We also attempted to determine how many of the families facing extreme delinquency or foreclosure were already in their home when they took the loan that became seriously delinquent or was in foreclosure. In order to determine this we looked at how many purchase money loans the 16 lenders made in 1996, the last year for which such Home Mortgage Disclosure Act ("HMDA") data was available on a nationwide basis from the Right-to-Know network (www.rtk.net) which compiles HMDA data. In total, only 10% of the loans made by the lenders we looked at and for whom we could get data were purchase money loans. Spreadsheet lines 22 and 23. Thus, we estimated that 90% of the homeowners who were foreclosed upon or were headed for foreclosure by the 16 lenders owned their home before they took the subprime loan.

Default rates for individual lenders also appear to be rising as lenders make more and more loans and their loan portfolios age. We looked at delinquency rates for one company, Equicredit, because its report provided rates for three consecutive years. Equicredit's total default rate climbed from 5.58% in 1996, to 6.81% in 1997, to 8.27% in 1998. Equicredit Slide. Within those total delinquency numbers, the largest increase was in loans delinquent for 90 days or longer. In 1996, 2.8% of the loans were 90 or more days delinquent. In 1997, 3.57% of the loans were 90 or more days delinquent. In 1998, 4.56% of the loans were 90 or more days delinquent.

According to its10Q form filed with the SEC on November 15, 1999, ContiMortgage, which recently filed for bankruptcy, had delinquencies of 2.81% and defaults (foreclosures and bankruptcies) of 7.51% as of September 30, 1999, in its $12 billion portfolio. The defaults rose from 5.32% at September 30, 1998, to 6.22% at March 31, 1999, to 7.51% at September 30, 1999.

Similarly, in its 10Q filed with the SEC on February 22, 1999 Aames Financial Corp. reported delinquencies and defaults of 16.3% at December, 1998 and predicted that "[t]he seasoning of the old portfolio without the addition of new loans could cause delinquency rates to rise."

Defaults for static pools of loans present some of the most disturbing figures. We looked at the default performance for a single pool of loans made by WMC. The pool of loans was made in 1998. By December 21, 1999, of the 5610 loans in the pool 4.26% had been foreclosed upon with the property not yet sold (REO), another 14.32% were in foreclosure, and another 6.01% were in bankruptcy. A full 24.75% of the loans in the pool were in 90+ delinquency, foreclosure, bankruptcy, or already foreclosed. With 30 and 60 day delinquencies added to that, the total default and foreclosure rate on the pool was 27.93%. Chart and statistics for loans made by WMC.

Finally, while subprime mortgages made up only about 8% of outstanding mortgages in 1999, subprime mortgages accounted for more than 30% of 1999 mortgage defaults and foreclosures.