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Before the Joint Economic Committee U.S. Congress: 

United States Government Accountability Office: 

For Release on Delivery: 
Expected at 10:00 a.m. EDT:
Tuesday, July 28, 2009: 

Home Mortgages: 

Recent Performance of Nonprime Loans Highlights the Potential for 
Additional Foreclosures: 

Statement of William B. Shear, Director: 
Financial Markets and Community Investment: 


Chair Maloney and Members of the Joint Committee: 

I am pleased to be here today to discuss the performance of the 
nonprime mortgage market as of March 31, 2009, which includes subprime 
and Alt-A loans.[Footnote 1] Nonprime loans accounted for an increasing 
share of the overall mortgage market from 2000 through 2006, rising 
from 12 percent to 34 percent. Over this period, the dollar volume of 
nonprime mortgages originated annually climbed from $100 billion to 
$600 billion in the subprime market and from $25 billion to $400 
billion in the Alt-A market.[Footnote 2] However, in the summer of 
2007, the subprime and Alt-A market segments contracted sharply, partly 
in response to a dramatic increase in default and foreclosure rates for 
these mortgages. As of the first quarter of 2009, approximately 1 in 8 
nonprime mortgages were in the foreclosure process. These developments 
have prompted greater scrutiny of lending practices in the nonprime 
market, a number of government efforts to modify troubled loans, and 
proposals to strengthen federal regulation of the mortgage industry. 

My statement is based on a report being released at this hearing, 
titled Characteristics and Performance of Nonprime Mortgages.[Footnote 
3] To prepare the report, we analyzed data from LoanPerformance's (LP) 
Asset-backed Securities database for nonprime loans originated from 
2000 through 2007. The database contains loan-level data on nonagency 
securitized mortgages in subprime and Alt-A pools.[Footnote 4] About 
three-quarters of nonprime mortgages have been securitized in recent 
years, and the LP data cover the vast majority of them. The report 
includes a detailed description of our scope and methodology. We 
conducted our work in accordance with all sections of GAO's Quality 
Assurance Framework that are relevant to our objectives. 

My statement discusses (1) trends in the loan and borrower 
characteristics of nonprime mortgages originated from 2000 through 
2007; (2) the performance of these mortgages by market segment, product 
type, and geographic location as of March 31, 2009; and (3) the 
performance of recent nonprime loan cohorts as of that date.[Footnote 

Nonprime Mortgage Lending Increased from 2000 through 2006 and Included 
Many Loans with Features Associated with Poor Loan Performance: 

Nonprime mortgage originations grew rapidly from 2000 through 2005 
before sharply contracting in mid-2007 (see figure 1). Subprime 
mortgages accounted for approximately two-thirds of the increase in 
nonprime originations over that period rising from 457,000 in 2000 to 
2.3 million in 2005 before declining somewhat in 2006.[Footnote 6] Alt-
A originations, although a smaller share of the nonprime market, 
increased at an even faster rate than subprime originations, increasing 
18-fold from 2000 through 2005. From 2000 through 2007, an increasing 
proportion of subprime and Alt-A mortgages had loan and borrower 
characteristics that have been associated with a higher likelihood of 
default and foreclosure. These characteristics include adjustable 
interest rates, less than full documentation of borrower income and 
assets, and higher borrower debt burdens. For example, from 2000 
through 2007, the percentage of Alt-A mortgages that did not have full 
documentation rose from 60 percent to 80 percent. For subprime loans, 
the proportion of such mortgages grew from 20 percent to 38 percent, 
then decreased to 33 percent. This loan feature was originally intended 
for borrowers who have difficulty documenting their income, such as the 
self-employed, but it eventually became more widespread. Such loans can 
be problematic if borrowers or loan originators overstate income or 
assets to qualify borrowers for mortgages they may not be able to 

Figure 1: Number of Subprime and Alt-A Originations by Cohort Year, 

[Refer to PDF for image: multiple vertical bar graph] 

Cohort year: 2000; 
Alt-A: 78,183; 
Subprime: 456,631. 

Cohort year: 2001; 
Alt-A: 138,645; 
Subprime: 537,734. 

Cohort year: 2002; 
Alt-A: 231,404; 
Subprime: 784,963. 

Cohort year: 2003; 
Alt-A: 435,703; 
Subprime: 1,281,730. 

Cohort year: 2004; 
Alt-A: 936,667; 
Subprime: 1,947,430. 

Cohort year: 2005; 
Alt-A: 1,447,780; 
Subprime: 2,284,420. 

Cohort year: 2006; 
Alt-A: 1,329,630; 
Subprime: 1,782,680. 

Cohort year: 2007; 
Alt-A: 436,078; 
Subprime: 330,514. 

Source: GAO analysis of LP data. 

[End of figure] 

Serious Delinquency Rates Were Highest for Subprime Loans and Certain 
Adjustable Rate Mortgages and Varied by State: 

Approximately 1.6 million of the 14.4 million nonprime loans originated 
from 2000 through 2007 had completed the foreclosure process as of 
March 31, 2009. Of the 5.2 million loans that were still active at the 
end of March--that is, that had not been prepaid or completed the 
foreclosure process--almost one-quarter were seriously delinquent, 
meaning they were either 90 or more days behind in payments or already 
in the foreclosure process (see figure 2).[Footnote 7] As a result, 
hundreds of thousands of additional nonprime borrowers are at risk of 
losing their homes in the near future. Within the subprime market 
segment, about 28 percent of active loans were seriously delinquent, 
and within the active Alt-A segment, the serious delinquency rate was 
about 17 percent. Within both segments, serious delinquency rates were 
even higher for certain adjustable-rate mortgages (ARM). For example, 
in the subprime market the serious delinquency rate for short-term 
hybrid ARMs--which feature a fixed interest rate for 2 or 3 years and 
an adjustable rate thereafter--was 38 percent as of March 31, 2009. In 
the Alt-A market, the serious delinquency rate for payment-option ARMs-
-which allow borrowers to make payments lower than what would be needed 
to cover any of the principal or all of the accrued interest--was 
approximately 30 percent. The rates varied widely by location. At the 
state level, California, Florida, Illinois, Massachusetts, Nevada, and 
New Jersey had the highest rates as of March 31, 2009. Each state had 
rates above 25 percent, and Florida's rate of 38 percent was the 
highest in the country. In contrast, 12 states had serious delinquency 
rates of less than 15 percent, including Wyoming's rate of 9 percent, 
which was the lowest in the country. 

Figure 2: Percentage of All Nonprime Loans and All Active Nonprime 
Loans Originated from 2000 through 2007, by Performance Status, as of 
March 31, 2009: 

[Refer to PDF for image: two pie-charts] 

All nonprime loans: 
Prepaid: 53%; 
Active: 36%; 
Completed foreclosure process: 11%. 

Active nonprime loans: 
Current: 65%; 
Delinquent: 12%; 
In foreclosure process: 12%; 
In default: 11%. 

Source: GAO analysis of LP data. 

[End of figure] 

Recent Loan Cohorts Accounted for Most of the Serious Delinquencies and 
Had Successively Higher Cumulative Foreclosure Rates: 

Mortgages originated from 2004 through 2007 accounted for the majority 
of troubled loans. Of the active subprime loans originated from 2000 
through 2007, 92 percent of those that were seriously delinquent as of 
March 31, 2009, were from those four cohorts. Furthermore, loans from 
those cohorts made up 71 percent of the subprime mortgages that had 
completed the foreclosure process. This pattern was even more 
pronounced in the Alt-A market. Among active Alt-A loans, almost all 
(98 percent) of the loans that were seriously delinquent as of March 
31, 2009, were from the 2004 through 2007 cohorts. Likewise, 93 percent 
of the loans that had completed the foreclosure process as of that date 
were from those cohorts. 

Cumulative foreclosure rates show that the percentage of mortgages 
completing the foreclosure process increased for each successive loan 
cohort (see figure 3). Within 2 years of loan origination, 2 percent of 
the subprime loans originated in 2004 had completed the foreclosure 
process, compared with 3 percent of the 2005 cohort, 6 percent of the 
2006 cohort, and 8 percent of the 2007 cohort. Within 3 years of loan 
origination, 5 percent of the 2004 cohort had completed the foreclosure 
process, compared with 8 percent and 16 percent of the 2005 and 2006 
cohorts, respectively. The trend was similar for Alt-A loans, although 
Alt-A loans foreclosed at a slower rate than subprime loans. For 
example, within 3 years of origination, 1 percent of Alt-A loans 
originated in 2004 had completed the foreclosure process, compared with 
2 percent of the loans originated in 2005, and 8 percent of the loans 
originated in 2006.[Footnote 8] 

Figure 3: Cumulative Percentage of Subprime and Alt-A Loans that 
Completed the Foreclosure Process by Cohort Year, 2004-2007: 

[See PDF for image: two multiple line graphs] 


Loan duration in years: 1; 
Cohort year 2004: 0%; 
Cohort year 2005: 0%; 
Cohort year 2006: 0%; 
Cohort year 2007: 1%. 

Loan duration in years: 2; 
Cohort year 2004: 2%; 
Cohort year 2005: 3%; 
Cohort year 2006: 6%; 
Cohort year 2007: 8%. 

Loan duration in years: 3; 
Cohort year 2004: 5%; 
Cohort year 2005: 8%; 
Cohort year 2006: 16%. 

Loan duration in years: 4; 
Cohort year 2004: 8%; 
Cohort year 2005: 15%. 	 

Loan duration in years: 5; 
Cohort year 2004: 10%. 


Loan duration in years: 1; 
Cohort year 2004: 0%; 
Cohort year 2005: 0%; 
Cohort year 2006: 0%; 
Cohort year 2007: 0%. 

Loan duration in years: 2; 
Cohort year 2004: 0%; 
Cohort year 2005: 0%; 
Cohort year 2006: 2%; 
Cohort year 2007: 5%. 

Loan duration in years: 3; 
Cohort year 2004: 1%; 
Cohort year 2005: 2%; 
Cohort year 2006: 8%. 

Loan duration in years: 4; 
Cohort year 2004: 2%; 
Cohort year 2005: 6%. 	 

Loan duration in years: 5; 
Cohort year 2004: 3%. 	 

Source: GAO analysis of LP data. 

[End of figure] 

This trend is partly attributable to a stagnation or decline in home 
prices in much of the country beginning in 2005 and worsening in 
subsequent years. This situation made it more difficult for some 
borrowers to sell or refinance their homes to avoid default or 
foreclosure. In addition, borrowers who purchased homes (particularly 
for investment purposes) but now owed more than the properties were 
worth, had incentives to stop making mortgage payments in order to 
minimize their financial losses. The deterioration in credit quality 
for the successive cohorts may also reflect an increase in riskier loan 
and borrower characteristics, such as less than full documentation of 
borrower income and higher borrower debt burdens. 

Our full report provides additional information on the performance of 
nonprime loans, including breakdowns by Census division and 
congressional district. In two subsequent reports we are preparing at 
the request of the Chair and Vice Chair of the Joint Committee, we will 
provide additional information on the condition of the nonprime 
mortgage market. These reports will include examinations of the extent 
of negative home equity among nonprime borrowers; the influence of 
different loan, borrower, and economic variables on the likelihood of 
default; and sources of data on nonprime loans. The reports will also 
update the information we are issuing today on the performance of 
nonprime loans. 

Madam Chair, this concludes my prepared statement. I would be happy to 
answer any questions you or other members of the Joint Committee may 

Contacts and Staff Acknowledgements: 

For further information about this testimony, please contact William B. 
Shear, Director, at 202-512-8678 or Contact points for 
our Office of Congressional Relations and Public Affairs may be found 
on the last page of this statement. Individuals making key 
contributions to this testimony include Steve Westley (Assistant 
Director), Eric Charles, Colleen Moffatt, Jamila Kennedy, DuEwa Kamara, 
John Mingus, and Marc Molino. 

[End of section] 


[1] Although the categories are not rigidly defined, subprime loans 
feature higher interest rates and fees and are generally made to 
borrowers who have tarnished credit histories. Alt-A loans are 
generally for borrowers whose credit histories are close to prime, but 
the loans have one or more high-risk features such as limited 
documentation of income or assets. 

[2] See Inside Mortgage Finance, The 2009 Mortgage Market Statistical 
Annual, (Bethesda, Md., 2009), 4. 

[3] GAO, Characteristics and Performance of Nonprime Mortgages, 
[hyperlink,] (Washington, D.C.: 
July 28, 2009). 

[4] LP is a unit of First American CoreLogic, Incorporated. Nonagency 
mortgage-backed securities (MBS), also known as private-label MBS, are 
backed by nonconforming conventional mortgages securitized primarily by 
investment banks. Nonconforming mortgages are those that do not meet 
the purchase requirements of Fannie Mae or Freddie Mac because they are 
too large or do not meet certain underwriting criteria. 

[5] A loan cohort is a group of loans originated in the same year. 

[6] As previously noted, the data we used for our analysis do not cover 
the entire nonprime market but do cover the large majority of nonagency 
securitized mortgages within that market. Nonprime mortgages that were 
not securitized (i.e., mortgages that lenders held in their portfolios) 
may have different characteristics and performance histories than those 
that were securitized. 

[7] In comparison, as of the first quarter of 2007, active nonprime 
loans originated from 2000 through 2005 had a serious delinquency rate 
of 7.4 percent. 

[8] Three-year foreclosure rates for the 2007 cohort will not be 
available until 2010. However, as of March 31, 2009, the subprime and 
Alt-A cumulative foreclosure rates for the 2007 cohort were 10 percent 
and 7 percent, respectively. 

[End of section] 

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