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.”