Characteristics and Performance of Nonprime Mortgages

GAO-09-848R: Published: Jul 28, 2009. Publicly Released: Jul 28, 2009.

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William B. Shear
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During the first part of this decade, the number of mortgage originations grew rapidly, particularly in the nonprime segment of the mortgage market, which includes subprime and Alt-A loans. In dollar terms, nonprime loans accounted for an increasing share of the overall mortgage market, rising from 12 percent in 2000 to 34 percent in 2006. Over this period, the dollar volume of nonprime mortgages originated annually climbed from $100 billion to $600 billion in the subprime market and from $25 billion to $400 billion in the Alt-A market. However, these market segments contracted sharply in the summer of 2007, partly in response to a dramatic increase in default and foreclosure rates for these mortgages. As we reported in 2007, a loosening of underwriting standards for subprime and Alt-A loans contributed to this increase. As of the first quarter of 2009, approximately 1 in 8 nonprime mortgages were in the foreclosure process. The negative repercussions from nonprime lending practices has prompted greater scrutiny of this market segment, a number of government efforts to modify troubled loans, and proposals to strengthen federal regulation of the mortgage industry. To inform congressional oversight and decision making about efforts to address current problems in the mortgage market, Congress requested that we examine the evolution and condition of the nonprime market segment. Accordingly, this report discusses (1) trends in the loan and borrower characteristics of nonprime mortgages originated from 2000 through 2007 and (2) the performance of these mortgages as of March 31, 2009.

Nonprime lending increased rapidly earlier in the decade before abruptly declining in 2007 as the nation entered a financial crisis. In the data we analyzed, about two-thirds of the nonprime mortgages originated from 2000 through 2007 were subprime loans. The number of subprime originations increased more than five-fold from 2000 through 2005--rising from approximately 457,000 to about 2.3 million--before declining somewhat in 2006 and falling off sharply in 2007. Despite this generally rising trend, subprime loans accounted for a declining share of the nonprime market over this period because the volume of Alt-A originations increased at an even faster rate. Specifically, Alt-A originations grew 18-fold from 2000 through 2005--rising from approximately 78,000 to about 1.4 million--before declining in 2006 and declining further in 2007. As a result, the Alt-A share of the nonprime market increased from about 15 percent in 2000 to 43 percent in 2006, and continued to increase to 57 percent in 2007. The majority of nonprime loans originated from 2000 through 2007 were used to refinance an existing loan rather than to purchase a home. As of March 31, 2009, approximately 1.6 million of the 14.4 million nonprime loans (11 percent) originated from 2000 through 2007 had completed the foreclosure process. Subprime mortgages accounted for about 80 percent of these loans and Alt-A mortgages accounted for the remaining 20 percent. Additionally, about 7.6 million of the 14.4 million loans (53 percent) originated had prepaid as of March 31, 2009. Because many of these prepaid loans were due to borrowers refinancing into new nonprime mortgages, the total number of originations over the period we examined far exceeds the number of individual borrowers. For the majority of the 5.2 million nonprime loans that were still active as of March 31, 2009, the borrowers were current on their payments. However, about 1.2 million, or 23 percent, of these active loans were seriously delinquent (either in default or in the foreclosure process), indicating that hundreds of thousands of additional nonprime borrowers are at risk of losing their homes in the near future. Specifically, about 594,000 (11 percent) of active nonprime loans were in default and about 613,000 (12 percent) were in the foreclosure process. Within the subprime market segment, about 775,000 loans (28 percent) were seriously delinquent. Among active Alt-A mortgages, approximately 433,000 (17 percent) were seriously delinquent.

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