Tuesday, June 22, 2010

One more point about fixed-rate mortgages

They seem to be safer. From the Mortgage Bankers Association of America:

On a seasonally adjusted basis, the delinquency rate stood at 6.17 percent for prime fixed loans, 13.52 percent for prime ARM loans, 25.69 percent for subprime fixed loans, 29.09 percent for subprime ARM loans, 13.15 percent for FHA loans, and 7.96 percent for VA loans. On a non-seasonally adjusted basis, the delinquency rate fell for all loan types.

The foreclosure starts rate increased for all loan types with the exception of subprime loans. The foreclosure starts rate increased six basis points for prime fixed loans to 0.69 percent, 17 basis points for prime ARM loans to 2.29 percent, 18 basis points for FHA loans to 1.46 percent, and eight basis points for VA loans to 0.89 percent. For subprime fixed loans, the rate decreased nine basis points to 2.64 percent and for subprime ARM loans the rate decreased 39 basis points to 4.32 percent.

Some of this may just be that people who take less risk select themselves into fixed-rate loans, but even so....


Galton said...

Highly suspect data. From my comment at Worthwhile Canadian Initiative:

"Two points on the relative default rates between fixed/ARM:
-Some increased default is to be expected - the question is the trade-off between costs (including externalities).
-Most importantly: I have looked at some of these comparative figures, and for the most part, the data are NOT comparable. The securitizers may have SAID 'prime', but this does not mean they can be compared well - see the case brought by the SF Home Loan Bank about fraudulent reps and warranties. There is, ultimately, no common standard for prime.
-Keep in mind: the ONLY party securitizing fixed rate in any quantity was Fannie and Freddie. Almost literally the only game in town - anyone originating them was originating them for F&F.

If one really wanted to compare defaults on ARMs vs fixed, probably the only way to start would be ARMs from Freddie/Fannie (relatively few) to their fixed rate, and to be very careful about comparing like to like.

For a quick test to determine why there is something suspect about this data: can you think of any reason why, in a period when rates FELL, that the ARMs should have performed worse? All things being equal, rates on the ARMs should have fallen below their original payment levels, and hence defaults fallen. If this did not happen, there must have been some underlying other issue that was causing them to default - indicating that this comparison is probably not valid."

In addition, remember that this is during a period in which interest rates fell, so fixed rate mortgages with no prepayment restrictions would be expected to refinance. This changes the survivability/statistics - every loan that refinanced is repaid and can no longer default. How are these treated? (ARMs would be expected to remain in the pool, as no advantage to refinancing).

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