I am beginning to wonder whether there is a single statistic related to the state of the economy that can be trusted. The latest data point to bite the dust is the widely-quoted factoid that 13% of subprime mortgages are in default.
Turns out not only is this number wrong, but the methodology used to arrive at it is ludicrous. The Mortgage Banking Association, the source of this information, classifies loans as prime or subprime based on who originated them. Thus, all loans by New Century were subprime and all loans by Wells Fargo (the biggest full service bank in the subprime market) are prime.
Details from the story “Subprime delinquencies higher than reported” by Matthew Padilla in the O.C. Register:
Forget that 13% subprime delinquency number you heard about so much in the press and which some politicos and real estate folks turned on its head pointing out 87% of subprime borrowers are paying their mortgage.
I took another look at the transcript from the first-quarter conference call of IndyMac Bancorp, and caught this statement from CEO Michael Perry:
On subprime loans, one of the things that I think people aren’t aware of is that the Mortgage Bankers Association basically classifies the lender as a prime lender or a subprime lender. So for example, they classify IndyMac and Countrywide as prime lenders, and they classify New Century or whoever as a subprime lender. And all of their servicing portfolio is considered prime or subprime for the MBA. Ok? And so when you see that delinquency number in the press of 13% subprime delinquencies, it’s hugely understated. It is absolutely hugely understated. And the prime delinquencies are overstated.The subprime delinquencies are more like 18, 20, 22% delinquencies and that’s where I think you’re going to see the problems.
To see if Perry had it right, I quizzed the MBA and got this in response from Jay Brinkmann, vice president of research and economics:
Mr. Perry is correct that we have to differentiate by the type of servicer rather than the type of loan. This may not be a major issue because our latest subprime numbers are 14.4% delinquent by at least one payment, plus another 4.5% in foreclosure, for a total of 18.9% either delinquent or in foreclosure. For just subprime ARMs that number is 21.1%, so we agree with Mr. Perry’s estimates of the current state of the market.
Note that we have two levels of inaccuracy. The first is the bogus methodology of not having a way to classify the mortgages correctly (given the fragmentation of the industry and the lack of central reporting, you’d need to sample). But the second is that the MBA has been presenting delinquency statistics to the press and not including loans in foreclosure. I suppose that there is an argument to be made here (i.e., “that’s the way we’ve always presented it”) but the evident failure to tell reporters about foreclosures smells of a deliberate effort to obfuscate (one would assume that if both facts were included in the same press release or speech, both would have been repeated elsewhere).
But the outcome is no surprise when you have an industry group reporting on the actions of its members…..
I am not surprised to hear this story. This train has been running out of control for over 36 months. When market participants placed more trust in yesterday’s strategies – gains became more important than the underlying processes of the business. The industry must get back to basics and recognize the importance of housing as a means to financial stability for all market participants. What we see now is long term funding commitments giving way to investor needs for safety and gains. Basic fears across the market cycle have been fueled by greed.
The only way out of this current tailspin is innovation – new products and new practices. Long-term success for housing finance requires more innovation throughout the market process. It requires market participants to develop strategies around disruptive innovations. It is through disruptive innovations that transcend the market processes that we will create new markets or reshape existing markets by delivering relatively simple, convenient, low-cost innovations to a set of customers who are ignored by industry leaders expected to serve the common good. Who should bear the responsibility for the cost of a house? Who should determine the value of home?
These questions are fundamental to our national housing policies and as such will be critical to secure positive trends in economic growth.