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Chase opens mortgage office in Princeton, N.J.

National Mortgage Professional
Nov 15, 2007

Mortgage lender insolvencies due to bad credit near endMortgagePress.comMortgage lender insolvencies Mortgage lender insolvencies due to poor underwriting are probably nearing an end, according to a study of credit risk published by SMR Research Corporation of Hackettstown, N.J. Ironically, according to the study, investors have abandoned all private mortgage-backed securities, causing new mortgage market turmoil, even though most lenders who started the crisis have disappeared. The Mortgage Credit Crisis, a 250-page study, reviewed six measures of credit risk for each of 163 of the largest U.S. mortgage lenders. It scored each lender based on the results against a national average score of 1,000. Nearly all lenders with risk scores above 1,750 are already bankrupt, closed, sold or partially closed, the study found. Those that scored 1,300 to 1,750 have had mixed results. Companies that scored 1,000 to 1,300 may have trouble ahead, but due more to the financial panic than because of their own mistakes, SMR said. "The companies whose underwriting errors caused their own demise are largely gone or are well known to be among the 'walking wounded,'" said SMR President Stuart A. Feldstein. "But the industry crisis won't end until investors regain confidence and home prices stabilize." Eight of the nation's 10 largest mortgage lenders earned low risk scores, suggesting they maintained fairly high credit standards from 2004 to 2006, when most of the underwriting excesses occurred, SMR said. Bank of America had the lowest risk score (465) among the 10 biggest lenders. HSBC Bank had the highest score (1,444) among the top 10 lenders. Countrywide Financial had the second highest score among industry giants at 1,016, indicating slightly above-average risk, SMR said. The lender with the highest risk score was SouthStar Funding LLC of Atlanta, which scored 2,704. It is now closed. The study relied on county courthouse lien records covering most U.S. homeowners with debt, plus annual Home Mortgage Disclosure Act reports. The six credit risk criteria studied were: 1. Estimated combined loan-to-value (CLTV) ratios of each lender's pool of borrowers as of July 2007. (CLTV is mortgage debt—on combined loans if the borrower has two home-secured loans—as a percent of estimated current market value of the home.); 2. The percentage of total loans that were provided to sub-prime credit borrowers in a recent year; 3. The percentage of total loans recently made to borrowers without verified incomes (stated-income or Alt-A loans); 4. The lender's reliance on piggyback loans in 2005 and 2006 (two-loan packages typically used by high-CLTV borrowers who do not want private mortgage insurance); 5. The percentage of loans originated with adjustable rates; and 6. The percentage of loans with low teaser start-up interest rates, such as pay-option loans. SMR computed each item for each lender as a variance against national averages. The overall risk score combined the six variances on a weighted basis, giving more weight to the CLTV ratio than the other items. "High CLTV lending just prior to the national home-price decline caused the sharp rise in foreclosures, even more than lending to borrowers with low credit scores," Feldstein said. When home prices decline, borrowers with high CLTV ratios no longer can sell their homes or refinance to cure a delinquency. The study found that most of the time, the high CLTV lenders were the same firms that catered to borrowers with credit history problems. SMR said "risk layering"—the practice of making loans to people with multiple types of risks—was a central cause of the credit crisis. Aside from lender risk rankings, the study included 45 pages of analysis and data on the causes of the mortgage credit crisis, plus a section on future solutions. Stabilization of home prices would likely cause foreclosures to ebb, SMR noted. In turn, that would require either the Federal Reserve Board to cut short-term interest rates or the passage of a lot more time. For more information, visit
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