Home Mortgages:

Recent Performance of Nonprime Loans Highlights the Potential for Additional Foreclosures

GAO-09-922T: Published: Jul 28, 2009. Publicly Released: Jul 28, 2009.

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This testimony discusses the performance of the nonprime mortgage market as of March 31, 2009, which includes subprime and Alt-A loans. Nonprime loans accounted for an increasing share of the overall mortgage market from 2000 through 2006, rising from 12 percent to 34 percent. 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, in the summer of 2007, the subprime and Alt-A market segments contracted sharply, partly in response to a dramatic increase in default and foreclosure rates for these mortgages. As of the first quarter of 2009, approximately 1 in 8 nonprime mortgages were in the foreclosure process. These developments have prompted greater scrutiny of lending practices in the nonprime market, a number of government efforts to modify troubled loans, and proposals to strengthen federal regulation of the mortgage industry. statement discusses (1) trends in the loan and borrower characteristics of nonprime mortgages originated from 2000 through 2007; (2) the performance of these mortgages by market segment, product type, and geographic location as of March 31, 2009; and (3) the performance of recent nonprime loan cohorts as of that date. This statement is based on a report being released at this hearing, titled Characteristics and Performance of Nonprime Mortgages.

Approximately 1.6 million of the 14.4 million nonprime loans originated from 2000 through 2007 had completed the foreclosure process as of March 31, 2009. Of the 5.2 million loans that were still active at the end of March--that is, that had not been prepaid or completed the foreclosure process--almost one-quarter were seriously delinquent, meaning they were either 90 or more days behind in payments or already in the foreclosure process. As a result, hundreds of thousands of additional nonprime borrowers are at risk of losing their homes in the near future. Within the subprime market segment, about 28 percent of active loans were seriously delinquent, and within the active Alt-A segment, the serious delinquency rate was about 17 percent. Within both segments, serious delinquency rates were even higher for certain adjustable-rate mortgages (ARM). The rates varied widely by location. At the state level, California, Florida, Illinois, Massachusetts, Nevada, and New Jersey had the highest rates as of March 31, 2009. Among active Alt-A loans, almost all (98 percent) of the loans that were seriously delinquent as of March 31, 2009, were from the 2004 through 2007 cohorts. Likewise, 93 percent of the loans that had completed the foreclosure process as of that date were from those cohorts.

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