Background on Mortgage Markets

I asked colleague Alan Reynolds a question about mortgages today, and he replied with what I think are some useful points that usually don’t appear in the crisis-obsessed media. Here are what Alan believes are the rough stylized facts:

  • Most foreclosures are prime, not subprime.
  • Half of subprime mortgages are fixed, not ARMs.
  • The vast majority of recent subprime loans were for refinancing, not buying. As house appraisals went up, some just borrowed all the phantom equity and spent it.
  • About 96% of all mortgages are paid on time. Most of the rest are late, but not in default.
  • The main reason for default is that home prices fell in some areas, leaving more owed on the mortgage than the house is worth.
  • Serious delinquency (2-3 months late in payments) is much more common than foreclosure, partly because deals are being renegotiated. The media often confuse numbers of late payers with numbers of actual defaults.
  • Most foreclosures of ARMs happened before the rate adjusted, not after. Often within one year. This was often due to borrower fraud – lying about income and assets. When the house or condo could not be quickly flipped at a profit, those with zero down just stopped paying.
  • Very few subprime borrowers qualified for the lowest teaser rates – most paid about 7% or so from the start, so far as I can tell.
  • The adjustments on ARMs are limited, and with rates now falling some adjustment will be down rather than up.

Finally, Alan notes that there is a lot of misinformation out in the media about mortgages, much of it coming from the Center for Responsible Lending which, in turn, received a lot of cash from John Paulson who just made $3-4 billion by shorting mortgage-backed securities during the panic and hype about “subprime.”