While investors previously relied on reported loan-level owner-occupancy data as a primary indicator of mortgage default and delinquency, increased mortgage fraud among recent loan vintages has called this information into question, says Equifax Capital Markets. Even in instances where fraud has not been a factor, owner-occupancy data reported at origination is typically out-of-date, according to the firm.
‘Mortgage security investors are demanding unprecedented visibility into borrowers' constantly changing credit behaviors, so they can monitor risk and more accurately predict performance,’ says Steve Albert, vice president at Equifax Capital Markets. ‘For this reason, it is critical that investors have an up-to-date assessment of owner-occupancy in order to accurately predict defaults and loss severities for mortgage securities.’
To analyze this trend, Equifax used a proprietary indicator to assess the up-to-date owner-occupancy of non-agency securitized mortgage loans. In the study, the company evaluated a sample of loan-level data on 2 million current non-agency securitized loans that were linked to up-to-date borrower credit data.
For current loans outstanding in November 2008, the 12-month default rate was 4.5% for loans identified as the borrower's principal residence at origination, compared to 6.5% for investment properties.
According to Equifax's study of owner-occupancy data for seasoned loans, 18% of loans reported as owner-occupied at origination no longer appeared to be in November 2008 and subsequently defaulted at a rate of 7%. Further analysis indicated that 66% of the loans appeared to be owner-occupied – with those loans defaulting at a rate of only 3.7%. The remaining 16% of loans, where up-to-date owner-occupancy was unclear, defaulted at 5.3%.
About 11% of the loans studied appear to never have been owner-occupied, while 7% appear to have been owner-occupied for some time but no longer are. Those loans defaulted at a slightly lower rate than those that appear to never have been owner-occupied, Equifax says.
Some of these loans were misreported as owner-occupied at origination, while in other instances, some owners became landlords, the company explains. For example, a borrower may purchase a residence, live in it for a few years, and then subsequently buy a new home and rent out the former residence. Another scenario involves a borrower purchasing a second home – making it appear that their residence is notÂ currently owner-occupied.
SOURCE: Equifax Capital Markets