Magazine article American Banker

Loan Quality Falls as Competition Boosts Risk

Magazine article American Banker

Loan Quality Falls as Competition Boosts Risk

Article excerpt

Rising interest rates in the first three quarters of 1994 led to reduced production of new nonConforming jumbo loans, decreasing the quantity of mortgage loans available for securitization.

The resultant situation has left issuers and originators competing aggressively for each loan, sometimes compromising credit quality to generate enough critical mass to create a mortgage-backed security (MBS). Consequently, asset quality has deteriorated and risk has greatly increased.

Heightened competition significantly impacts the asset quality and risk of a loan pool. For example, current conditions are such that it may be tempting for an underwriter to validate a borderline loan that formerly would have been rejected.

A review of current pool characteristics reflects this decline in asset quality. During the first quarter of 1994, when production was still quite robust, the weighted-average LTVs of 30-year fixed-rate mortgage pools were about 71% to 72%. In contrast, current pools have moved toward weighted-average LTVs of 77% to 79%, and some pools are as high as 82% to 84% weighted-average LTV. This change is adverse because the higher the LTV, the more likely a loan is to default and the higher the potential loss on the loan.

Another characteristic that has changed is the quality of borrower occupancy attributes. PreViously, pools rarely included any investor-occupied properties. However, the percentage of investor properties, which are generally riskier than other property types, has increased to about 3% and sometimes as high as 10% of the pool.

Pool property-type characteristics have changed as well. Pools that once consisted predominantly of single-family home loans are now made up of a mix of single-family homes, condominium properties, and planned unit developments (PUDs). These property types are risky because they may take longer to liquidate and, consequently, may realize added costs. …

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