Subprime Mortgage Delinquency and Default Rates by Metropolitan Area: An Analysis by Origination Vintages and Projections for 2007

Abstract

Subprime mortgage default rates have led to a crisis in the residential mortgage markets unprecedented since the Great Depression. Information reported on these defaults has demonstrated that they vary by location and region. To properly understand the causes of such high rates of mortgage defaults, we undertook this study. It reports on a cross-section analysis of default rates of residential, subprime and Alt-A mortgages aggregated to the metropolitan areas (MSA) level. The hypotheses tested here represent the effects of loan and borrower level characteristics and MSA economic factors, such as MSA employment growth, unemployment rate, household income and housing price changes and their volatility on the level of default rates on subprime mortgages. We test these by origination vintage for 2005 and 2006 and project default rates by MSA into 2007 using 2006 vintage estimated parameters. We find that loan and borrower level characteristics such as loan-to-value ratio weighted by original loan balances, the weighted proportion of loans that have no documentation or the borrowers’ weighted FICO score and MSA economic factors of housing price changes and employment growth are highly statistically significant and economically important in explaining MSA subpirme residential mortgage default rates over the 359 MSAs for 2005 and 2006 vintages. The data used are from Loan Performance data base for 6 million subprime loans separated into 2005 and 2006 vintages, the OFHEO (now FHFA) Housing Price Index and household employment Dept. of Labor. Projections of housing price changes and employment growth for each MSA were used based on a linear extrapolation of the past 9 months of 2006 and the first 3 months of 2007. The main finding is that the projected default rates for all of 2007 are larger than those of 2005 and 2006 on average.