Information on Recent Default and Foreclosure Trends for Home	 
Mortgages and Associated Economic and Market Developments	 
(16-OCT-07, GAO-08-78R).					 
                                                                 
Substantial growth in the mortgage market in recent years has	 
helped many Americans become homeowners. However, as of the	 
latest quarterly data available, June 2007, more than 1 million  
mortgages were in default or foreclosure, an increase of 50	 
percent compared with June 2005. Defaults and foreclosures on	 
home mortgages can impose significant costs on borrowers,	 
lenders, mortgage investors, and neighborhoods. Additionally,	 
recent increases in defaults and foreclosures have contributed to
concern and increased volatility in certain U.S. and global	 
financial markets. These developments have raised questions about
the extent and causes of problems in the mortgage market. To	 
provide some insights on these issues, Congress asked GAO to	 
analyze (1) the scope and magnitude of recent default and	 
foreclosure trends, and how these trends compare with historical 
values, and (2) developments in economic conditions and the	 
primary and secondary mortgage markets associated with these	 
trends. 							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-78R 					        
    ACCNO:   A77367						        
  TITLE:     Information on Recent Default and Foreclosure Trends for 
Home Mortgages and Associated Economic and Market Developments	 
     DATE:   10/16/2007 
  SUBJECT:   Comparative analysis				 
	     Economic analysis					 
	     Federal/state relations				 
	     Financial analysis 				 
	     Financial management				 
	     Foreclosures					 
	     Lending institutions				 
	     Loan interest rates				 
	     Mortgage interest rates				 
	     Mortgage loans					 
	     Mortgage programs					 
	     Mortgage-backed securities 			 
	     Prime interest rates				 
	     Standards						 

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GAO-08-78R

This is the accessible text file for GAO report number GAO-07-78R 
entitled 'Information on Recent Default and Foreclosure Trends for Home 
Mortgages and Associated Economic Market Developments' which was 
released on October 16, 2007. 

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United States Government Accountability Office: 

GAO: 

VersION 4.4.8: 

Default and Foreclosure Trends: 

GAO-08-78R: 

United States Government Accountability Office: 

Washington, DC 20548: 

October 16, 2007: 

The Honorable Barney Frank Chairman Committee on Financial Services 
House of Representatives: 

The Honorable Spencer Bachus Ranking Member Committee on Financial 
Services House of Representatives: 

Subject: Information on Recent Default and Foreclosure Trends for Home 
Mortgages and Associated Economic and Market Developments: 

Substantial growth in the mortgage market in recent years has helped 
many Americans become homeowners. However, as of the latest quarterly 
data available, June 2007, more than 1 million mortgages were in 
default or foreclosure, an increase of 50 percent compared with June 
2005.[Footnote 1] Defaults and foreclosures on home mortgages can 
impose significant costs on borrowers, lenders, mortgage investors, and 
neighborhoods. Additionally, recent increases in defaults and 
foreclosures have contributed to concern and increased volatility in 
certain U.S. and global financial markets. These developments have 
raised questions about the extent and causes of problems in the 
mortgage market. 

To provide some insights on these issues, you asked us to analyze (1) 
the scope and magnitude of recent default and foreclosure trends, and 
how these trends compare with historical values, and (2) developments 
in economic conditions and the primary and secondary mortgage markets 
associated with these trends. On October 10, 2007, we briefed your 
offices on the results of this work. This letter provides a brief 
summary of those results, and the enclosures contain the more detailed 
briefing materials and a bibliography of related research. 

Background: 

The primary mortgage market has several segments and offers a range of 
loan products: 

* The prime market serves borrowers with strong credit histories and 
provides the most competitive interest rates and mortgage terms. In 
2006, the prime market segment accounted for about 58 percent of 
mortgage originations (in dollar terms).[Footnote 2] 

* The Alt-A market (accounting for about 16 percent of mortgage 
originations) generally serves borrowers whose credit histories are 
close to prime, but the loans often have one or more higher-risk 
features such as limited documentation of income or assets. 

* The subprime market (about 24 percent of mortgage originations) 
generally serves borrowers with blemished credit and features higher 
interest rates and fees than the prime market. 

* Finally, the government-insured or -guaranteed market (about 3 
percent of mortgage originations) primarily serves borrowers who may 
have difficulty qualifying for prime mortgages but features interest 
rates competitive with prime loans in return for payment of insurance 
premiums or guarantee fees. The Federal Housing Administration and 
Department of Veterans Affairs operate the two main federal programs 
that insure or guarantee mortgages. 

Across all of these market segments, two types of loans are common: 
fixed-rate mortgages (FRM), which have interest rates that do not 
change over the life of the loans; and adjustable-rate mortgages (ARM), 
which have interest rates that change periodically based on changes in 
a specified index. 

One of the main sources of information on the status of mortgage loans 
is the Mortgage Bankers Association's (MBA) quarterly National 
Delinquency Survey (NDS), which represents about 80 percent of the 
mortgage market. The NDS provides national and state-level information 
on mortgage delinquencies, defaults, and foreclosures back to 1979 (a 
28-year span) for first-lien purchase and refinance mortgages on one- 
to-four family residential units.[Footnote 3] The data are 
disaggregated by market segment and loan type (FRM or ARM) but do not 
contain information on other loan or borrower characteristics. NDS data 
provide two measures of foreclosure: (1) foreclosure starts, which are 
loans that entered the foreclosure process during the quarter and (2) 
foreclosure inventory, which represents the aggregate number of loans 
that were in the foreclosure process during the quarter (regardless of 
when they entered the process). 

The secondary mortgage market plays an important role in providing 
liquidity--that is, supplying capital--for mortgage lending by bundling 
mortgages into securities (called residential mortgage-backed 
securities or RMBS) that are bought and sold by investors. The 
secondary market consists of (1) Ginnie Mae securities, which are 
backed by government-guaranteed mortgages; (2) government-sponsored 
enterprise (GSE) securities backed by mortgages that meet the 
requirements for purchase by Fannie Mae and Freddie Mac;[Footnote 4] 
and (3) private label securities, which are backed by mortgages that do 
not conform to GSE purchase requirements because they are too large or 
do not meet GSE underwriting criteria. Investment banks bundle most 
subprime and Alt-A loans into private label RMBS. 

Summary: 

Overall, the number and percentage of mortgages in default or 
foreclosure rose sharply from the second quarter of 2005 through the 
second quarter of 2007 to levels at or near historical highs, but there 
was significant variation among market segments, loan types, and 
states.[Footnote 5] More specifically: 

* The overall default rate grew by 29 percent, reaching a point at 
which just over 1 in every 100 mortgages was in default, almost a 28- 
year high. The foreclosure start rate did reach a 28-year high, rising 
by 55 percent. (See graph on slide 14 in enclosure I for additional 
details.) 

* The subprime market experienced substantially steeper increases in 
default and foreclosure start rates than the prime or government- 
insured markets, accounting for two-thirds or more of the overall 
increase in the number of loans in default or foreclosure during this 
time frame. 

* Among types of loans, ARMs experienced relatively steeper growth in 
default and foreclosure rates, compared with FRMs which experienced no 
or modest increases. 

* Several "Sun Belt" states such as Arizona, California, Florida, and 
Nevada experienced some of the largest increases in the number and 
percentage of defaults and foreclosures. Industrial midwest states such 
as Michigan and Ohio saw more modest growth in default and foreclosure 
rates but accounted for a significant part of the increase in the 
number of troubled loans in part because their default and foreclosure 
rates started at higher levels. Other states, such as New Mexico, 
Oregon, and Utah experienced little or no growth in default and 
foreclosure rates. 

According to mortgage industry researchers and participants, the number 
and percentage of loans in default and foreclosure are likely to worsen 
through the end of 2007 and into 2008, due partly to scheduled payment 
increases for many ARMs. 

A number of studies and industry data indicate that a combination of 
economic and market developments contributed to recent increases in 
default and foreclosure rates: 

* First, the rapid decline in the rate of home price appreciation 
throughout much of the nation beginning in 2005 may have reduced 
incentives for borrowers to keep current on their mortgages and made it 
more difficult for borrowers to refinance or sell their homes to avoid 
default or foreclosure. Our analysis found that states that experienced 
a sharp decline in house price appreciation following a period of 
strong growth (e.g., California, Florida, and Nevada) generally 
experienced larger percentage increases in foreclosure start rates from 
the second quarter of 2005 through the second quarter of 2007. 

* Second, in some states with foreclosure rates that were already 
relatively high in 2005, weak labor market conditions likely 
contributed to mortgage problems. For example, the two states with the 
lowest rates of employment growth in recent years--Michigan and Ohio-- 
experienced the third-and sixth-largest increases in the number of 
foreclosure starts. 

* Third, more aggressive lending practices--an easing of underwriting 
standards and wider use of certain loan features associated with poorer 
loan performance--reduced the likelihood that some borrowers would be 
able to meet their mortgage obligations, particularly in times of 
economic hardship or limited house price appreciation. For example, 
data on private label securitized loans show significant increases from 
2000 through 2006 in the percentage of mortgages with higher loan-to- 
value ratios (the amount of the loan divided by the value of the home), 
adjustable interest rates, limited or no documentation of borrower 
income or assets, and deferred payment of principal or interest. 

* Fourth, growth in the market for private label RMBS beginning in 2003 
provided liquidity to some brokers and lenders to support these more 
aggressive lending practices. Investors were attracted to these 
securities because of their seemingly high risk-adjusted returns. 

A number of other factors--including incentives that potentially 
emphasized loan volume over loan quality and growth in the incidence of 
mortgage fraud--may have contributed to recent default and foreclosure 
trends, but additional information would be needed to fully assess 
their impact. 

Scope and Methodology: 

To assess the scope and magnitude of recent trends in defaults and 
foreclosures and compare these trends to historical values, we analyzed 
NDS data from 1979 through the second quarter of 2007 (the most recent 
quarter for which data were available). The NDS data provide 
information on first-lien purchase and refinance mortgages on one-to 
four-family residential properties. For the entire period, we examined 
national and state-level trends in the number and percentage of loans 
that were in default, starting the foreclosure process, and in the 
foreclosure inventory each quarter. We also identified historical 
maximums and calculated long-run medians for these measures. For the 
second quarter of 2005 through the second quarter of 2007, we 
disaggregated the data by market segment and loan type, calculated 
absolute and percentage increases in default and foreclosure measures, 
compared and contrasted trends for each state, and compared default and 
foreclosure start rates at the end of this period to historical 
maximums and medians. We assessed the reliability of the NDS data by 
reviewing existing information about the quality of the data, 
performing electronic testing to detect errors in completeness and 
reasonableness, and interviewing MBA officials knowledgeable about the 
data. We determined that the data were sufficiently reliable for 
purposes of this report. 

To analyze developments in economic conditions and the primary and 
secondary mortgage markets that may be associated with recent default 
and foreclosure trends, we analyzed NDS data, the Office of Federal 
Housing Enterprise Oversight's (OFHEO) quarterly house price index 
(HPI) for purchase transactions, and data on employment growth from the 
Bureau of Labor Statistics.[Footnote 6] For each state, we calculated 
the average rate of growth in the HPI from the third quarter of 2003 
through the first quarter of 2006 (a period of relatively steady growth 
in the HPI at the national level) and projected what the HPI would have 
been had this rate of growth continued through the second quarter of 
2007. We then divided the projected HPI by the actual HPI as of the 
second quarter of 2007, with higher ratios indicating states that 
experienced relatively sharp drop-offs in house price appreciation 
after a period of strong growth. We ranked the states based on this 
ratio and determined the extent to which states with higher rankings 
had also experienced relatively greater percentage increases in 
foreclosure start rates from the second quarter of 2005 through the 
second quarter of 2007. 

With regard to labor market conditions, we ranked states based on their 
percentage change in employment from the fourth quarter of 2001 (the 
end of the last recession) through the second quarter of 2007 and 
examined the relationship between this measure and changes in the 
number and percentage of loans entering foreclosure from the second 
quarter of 2005 through the second quarter of 2007. Additionally, we 
reviewed relevant industry, government, and academic data and research 
on factors that may have contributed to recent default and foreclosure 
trends. We did not independently confirm the accuracy of the 
information and analysis that we obtained from third parties. However, 
we took steps to ensure that the data we used from these sources were 
sufficiently reliable for our purposes, such as reviewing existing 
information about data quality, interviewing officials familiar with 
the data, and corroborating key information. Finally, we interviewed 
officials from bank regulatory institutions, the Department of Housing 
and Urban Development, Federal Trade Commission, Securities and 
Exchange Commission, mortgage lenders, investment banks, credit rating 
agencies, academia, and industry and consumer groups. 

We performed our work from June 2007 through October 2007 in accordance 
with generally accepted government auditing standards. We provided a 
draft of the briefing materials to the Board of Governors of the 
Federal Reserve System, the Federal Deposit Insurance Corporation, the 
Office of the Comptroller of the Currency, and the Office of Thrift 
Supervision for their technical comments, which we incorporated where 
appropriate. 

We are sending copies of this report to the Chairman and Ranking 
Member, Senate Committee on Banking, Housing, and Urban Affairs; 
Chairman and Ranking Member, Subcommittee on Housing, Transportation, 
and Community Development, Senate Committee on Banking, Housing, and 
Urban Affairs; and Chairwoman and Ranking Member, Subcommittee on 
Housing and Community Opportunity, House Committee on Financial 
Services. We will also send copies to other interested parties and make 
copies available to others upon request. In addition, the report will 
be available at no charge on GAO's Web site at [hyperlink, 
http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-8678, or [email protected]. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Key contributors to this report are 
listed in enclosure II. 

Signed by: 

David G. Wood: 

Director, Financial Markets and Community Investment: 

[End of section] 

Enclosure I: Briefing to the Committee on Financial Services, House of 
Representatives: 

Home Mortgage Defaults and Foreclosures: 
Recent Trends and Associated Economic and Market Developments: 
Briefing to the: 
Committee on Financial Services: 
House of Representatives: 
October 10, 2007: 

Overview: 

Objectives: 
Scope and methodology: 
Summary: 
Background: 
Recent default and foreclosure trends: 
Developments associated with recent trends: 

Objectives: 

* Analyze the scope and magnitude of recent trends in home mortgage 
defaults and foreclosures, and how these trends compare with historical 
values. 

* Evaluate developments in economic conditions and the primary and 
secondary mortgage markets associated with recent default and 
foreclosure trends. 

Scope and Methodology: 

Scope: 

* First-lien purchase and refinance mortgages one-to-four family 
residential properties, second quarter of 2005 through the second 
quarter of 2007.

Methodology: 

* Analysis of data collected by the Mortgage Bankers Association's 
(MBA) quarterly National Delinquency Survey (NDS), which

- contains national and state-level information on mortgage 
delinquencies, defaults, and foreclosures back to 1979, disaggregated 
by market segment and loan type, and: 

- represents about 80 percent of the mortgage market. 

* Analysis of state-level data on house price appreciation and 
employment growth.

* Review of relevant industry, government, and academic research.

* Interviews with officials from bank regulatory institutions, the 
Department of Housing and Urban Development, the Federal Trade 
Commission, the Securities and Exchange Commission, mortgage lenders, 
investment banks, credit rating agencies, academia, and industry and 
consumer groups. 

Summary: 

Overall, defaults and foreclosures have risen sharply over the last 2 
years but they have varied significantly among market segments, loan 
types, and states. 

* Default and foreclosure rates grew to levels at or near historical 
highs. 

* Subprime and adjustable-rate mortgages accounted for most of the 
overall increase. 

* While foreclosure rates more than doubled in eight states, they 
remained flat or declined in nine states.

A combination of economic and market developments contributed to these 
trends: 

* House price changes reduced incentives for borrowers to keep current 
on their mortgages or made it more difficult to avoid foreclosure. 

* Aggressive lending practices reduced the likelihood that some 
borrowers would be able to meet their mortgage obligations. 

* Growth in the private mortgage-backed securities market provided 
liquidity to support these lending practices. 

The mortgage market grew rapidly in early part of decade as long-term 
mortgage interest rates fell.

The nationï¿½s homeownership rate increased from about 67.4 percent in 
2000 to 68.8 percent in 2006.

The percentage of home purchase mortgage originations for borrowers who 
were not owner- occupants (e.g., investors) increased from about 8 to 
16.5 percent over the same period. 

Figure: 

[See PDF for image]-graphic text: 

This is a line combo chart with 2 lines. Law originations, 0-4,000, are 
in (dollars in billions), and are compared to the interest rates, 0-12. 
The bottom of the chart shows the years 1990-2006. 

Source: GAO analysis of data from inside Mortgage Finance. 

[End of figure] 

Background: 

The primary mortgage market has several segments. 

* Prime - Serves borrowers with strong credit histories and provides 
the most competitive interest rates and mortgage terms. 

* Alternative-A (Alt-A) - Generally serves borrowers whose credit 
histories are close to prime, but loans often have one or more higher-
risk features such as limited documentation of income or assets. 

* Subprime - Generally serves borrowers with blemished credit and 
features higher interest rates and fees than the prime market. 

* Government-insured or guaranteed - Primarily serves borrowers who may 
have difficulty qualifying for prime mortgages but features interest 
rates competitive with prime loans in return for payment of guarantee 
fees. The Federal Housing Administration (FHA) and Department of 
Veterans Affairs (VA) operate the two main federal programs that insure 
or guarantee mortgages. 

Note: There is no uniform definition across the lending industry for 
what characterizes a loan as subprime or Alt-A. 

Background: 

The mortgage market offers a range of loan products, which may be 
available in more than one market segment.

* Fixed-rate mortgage (FRM) ï¿½ interest rate does not change over the 
life of the loan. 

* Adjustable rate mortgage (ARM) ï¿½ interest rate changes periodically 
over the life of the loan based on changes in a specified index. 

* Hybrid ARM ï¿½ interest rate is fixed and relatively low during an 
initial period then ï¿½resetsï¿½ to an adjustable rate for the remaining 
term of the loan. In the subprime market, 2/28 loans (fixed rate for 2 
years, adjustable rate for 28 years) are a common type of hybrid ARM. 

* Option ARM ï¿½ borrower has multiple payment options each month, which 
may include payments lower than needed to cover interest (deferred 
interest is added to the loan balance). 

* Interest-only mortgage ï¿½ borrower pays just the interest on the loan 
for a specified period, thereby deferring payment of principal. 

* Piggyback loan ï¿½ simultaneous second mortgage that allows the 
borrower to make little or no down payment on the first mortgage. 

* Jumbo mortgage ï¿½ loan amount is larger than the maximum eligible for 
purchase by Fannie Mae and Freddie Mac (currently $417,000). 

* Nonconforming mortgage ï¿½ does not meet the purchase requirements of 
Fannie Mae or Freddie Mac because it is too large or does not meet 
their underwriting criteria. 

Mortgages are originated through three major channels: 

* Mortgage brokers ï¿½ Independent contractors that originate loans for 
multiple lenders who underwrite and close the loans.

* Loan correspondents ï¿½ Generally smaller lenders that originate, 
underwrite, and close loans and immediately sell them to other 
(generally larger) lenders. 

* Retail lenders ï¿½ Lenders that originate, underwrite, and close loans 
without reliance on brokers or correspondents.

Large mortgage lenders may originate loans through a combination of 
these channels. 

* In dollar terms, subprime lending grew from about 9 to 24 percent of 
mortgage originations (excluding home equity loans) from 2003 through 
2006. 

* Over the same period, Alt-A lending grew from about 2 to almost 16 
percent of mortgage originations, and the share for loans with 
government insurance or guarantees fell from about 6 to 3 percent.

* As we reported in June 2007, in terms of number of loans, the 
subprime share of the market for home purchase mortgages grew most 
rapidly in census tracts with lower median incomes and higher 
concentrations of minorities, the same areas where FHAï¿½s share dropped 
most sharply. 

Figure: 

[See PDF for image]-graphic text: 

This is a line combo chart. The percent of mortgage originations (in 
dollar terms) is on the X axis, and the years 2001-2006 are on the Y 
axis. 

Source: GAO analysis of data from Inside Mortgage Finance. 

Note: Data exclude home equity loans. 

[End of figure] 

Background: 

The secondary mortgage market plays an important role in providing 
liquidity for mortgage lending by bundling mortgages into securities 
(residential mortgage-backed securities or RMBS) that are bought and 
sold by investors. 

* Ginnie Mae, government-sponsored enterprises (GSE), and private label 
RMBS are the major segments of this market.

* Private label RMBS, also called ï¿½nonagency RMBS,ï¿½ are backed by jumbo 
and other nonconforming mortgages securitized primarily by investment 
banks. 

* Purchasers of RMBS include hedge funds, pension funds, insurance 
companies, banks, and managers of other complex structured finance 
products known as collateralized debt obligations. 

Delinquency, default, and foreclosure rates are common measures of loan 
performance.

* Delinquency is the failure of a borrower to meet one or more 
scheduled monthly payments.

* Default generally occurs when a borrower is 90 or more days 
delinquent. At this point, foreclosure proceedings against the borrower 
become a strong possibility.

* Foreclosure is a legal (and often lengthy) process with several 
possible outcomes, including that the borrower sells the property or 
the lender repossesses the home.

* Two measures of foreclosure are (1) foreclosure starts (loans that 
entered the foreclosure process during a particular time period) and 
(2) foreclosure inventory (loans that were in, but had not exited, the 
foreclosure process during a particular time period). 

Note: There is no uniform definition of default across the lending 
industry. The NDS data measure the percentage of loans serviced each 
quarter that were 30, 60, or 90 days delinquent; entered foreclosure; 
or were in the process of foreclosure. 

Default and foreclosure rates for home mortgages have varied over time 
and have increased during both recessionary and nonrecessionary periods.

[See PDF for image]-graphic text: 

This are two line combo graphs containing three lines in the first 
graph, and three lines in the second graph. The percentages are on the 
X axis, and the years are on the Y axis. Default, Foreclosure starts, 
Foreclosure inventory, and Periods of economic recession are shown by 
different colored lines on the graphs. 

Source: GAO analysis of MBA data, National Bureau of Economic Research. 

[End of figure] 

Table: Default and Foreclosure Trends National Level (1979-2007): 

The number and percentage of mortgages in default or foreclosure rose 
sharply from the second quarter of 2005 (the most recent ï¿½lowï¿½ level) 
through the second quarter of 2007 (the most recent quarter for which 
NDS data are available). 

Number of defaults; 
Q2 2005: 331,000; 
Q2 2007: 473,000; 
Percentage increase: 43%. 

Default rate; 
Q2 2005: 0.83%;  
Q2 2007: 1.07%; 
Percentage increase: 29%. 

Number of foreclosure starts; 
Q2 2005: 151,000; 
Q2 2007: 261,000; 
Percentage increase: 73%. 

Foreclosure start rate; 
Q2 2005: 0.38%; 
Q2 2007: 0.59%; 
Percentage increase: 55%.

Foreclosure inventory; 
Q2 2005: 399,000; 
Q2 2007: 619,000; 
Percentage increase: 55%. 

Foreclosure inventory rate; 
Q2 2005: 1.0%; 
Q2 2007: 1.4%; 
Percentage increase: 40%. 

Source: GAO analysis of MBA data. 

Note: Defaults do not include loans in foreclosure. We calculated the 
number of defaults and foreclosures by multiplying default and 
foreclosure rates by the number of loans that the NDS showed as being 
serviced and rounding to the nearest thousand.

[End of table] 

Figure: Default and foreclosure trends: National Level (Market 
Segments): 

Changes in foreclosure start rates have varied by market segment. 

[See PDF for image]-graphic text: 

This is a bar chart with 9 groups, three bars per group. The bars 
represent prime, government-insured or -guaranteed, and subprime. The X 
axis represents the foreclosure start rate, between 0 and 2.5, and the 
Y axis represents years. 

Source: GAO analysis of MBA data. 

Note: NDS data do not separately identify Alt-A loans but include them 
in the prime and subprime categories. 

[End of figure] 

Figure: Default and Foreclosure Trends: National Level: (Market 
Segments): 

According to NDS data, subprime loans accounted for less than 15 
percent of the loans serviced but about two-thirds of the overall 
increase in the number of mortgages in default and foreclosure from the 
second quarter of 2005 through the second quarter of 2007. 

[See PDF for image]-graphic text: 

This is a pie combo chart with three pie charts. The first shows the 
increase in number defaults as 34.6% being prime portion of increase, 
and 65.4% being subprime portion of increase. The second pie chart 
shows the increase in number of foreclosure starts as 29.3% being prime 
portion of increase, and 70.7% being subprime portion of increase. The 
third pie chart shows the increase of foreclosure inventory as being 
31.1% prime portion of increase, and 68.9% as being subrprime portion 
of increase. 

Source: GAO analysis of MBA data. 

Note: We excluded government-insured or -guaranteed loans because they 
did not contribute to the increase in foreclosure starts over the 
period we examined.  

[End of figure] 

Figure: Default and Foreclosure Trends National Level (Market 
Segments): 

Subprime loans originated in late 2005 and 2006 are playing a major 
role in recent defaults and foreclosures.

* According to researchers at the financial services firm UBS, 2005 and 
2006 originations accounted (in dollar terms) for roughly three-
quarters of the sub rime loans in foreclosure as of September 2007.

* An analysis by Moodyï¿½s Investors Service of subprime mortgages 
securitized each quarter from 2005 through the first quarter of 2007 
shows that the rate of serious delinquency among similarly aged loans 
worsened for each successive quarterly group. 

[See PDF for image]-graphic text: 

This is a combo line chart with nine lines. The X axis represents the 
percent of securitized loan balance, 0-15, while the Y axis represents 
the months since securitization closing, 0-25. 

Source: GAO analysis of data for Moody's. 

[End of figure] 

Figure: Default and Foreclosure Trends National Level (FRMs and ARMs): 

Across market segments, ARMs experienced relatively steeper increases 
in default and foreclosure rates (compared with flat or modest growth 
for FRMs) and accounted for a disproportionate share of the increase in 
the number of loans in default and foreclosure. 

[See PDF for image]-graphic text: 

These are two line combo charts, one showing a foreclosure start rate, 
and the other showing a foreclosure inventory rate. Both graphs have 
percentages on the Y axis, and years on the X axis. The lines represent 
the subprime ARM, the subprime FRM, the prime PRM, and the prime FRM. 

Source: GAO analysis of MBA data. 

[End of figure] 

Default and Foreclosure Trends State Level: 

While foreclosure start rates varied among the states, in most states 
(41 states and the District of Columbia), they were higher in the 
second quarter of 2007 than in the second quarter of 2005. 

However, the magnitude of the increases varies substantially by state. 

Several ï¿½Sun Beltï¿½ states such as Arizona, California, Florida, and 
Nevada have experienced some of the largest increases in the number and 
percentage of defaults and foreclosures. 

States in the industrial midwest (e.g., Michigan, Ohio, and Indiana) 
have seen more modest growth in default and foreclosure rates but 
account for a significant part of the increase in the number of 
troubled loans, in part because their default and foreclosure rates 
started at higher levels.

Some states, such as Utah, New Mexico, and Oregon, have seen much 
smaller increases or even declines in default and foreclosure rates.

Figure: Default and Foreclosure Trends State Level: 

[See PDF for image]-graphic text: 

This figure is a map of the United States with a line chart below it. 
Different states are highlighted representing the percentage change in 
foreclosure start rate. 

Source: GAO analysis of MBA data; Art Explosion (map). 

[End of figure] 

Default and Foreclosure Trends National and State Historical 
Comparisons: 

As of the second quarter of 2007, the number and percentage of 
mortgages nationwide that were in default and foreclosure were near or 
above their highest levels since 1979 (the first year covered by the 
NDS data set).

* Default rate of 1.07 percent (second highest level); 

* Foreclosure start rate of 0.59 percent (highest level); and, 

* Foreclosure inventory rate of 1.40 percent (below the historical 
maximum of 1.51 percent, which occurred in 2002). 

Also as of the second quarter of 2007, 

the foreclosure start and foreclosure inventory rates were above their 
long-run historical medians in 47 and 40 states (including the District 
of Columbia), respectively.

foreclosure start rates were at their historical maximums in four 
states (Florida, Maine, Minnesota, and Nevada), as were foreclosure 
inventory rates in five states (Maine, Michigan, Minnesota, Ohio, and 
Rhode Island).
23

Default and Foreclosure Trends Outlook: 

* Mortgage industry researchers told us that the number and percentage 
of loans in default and foreclosure were likely to worsen through the 
end of this year and into 2008, due partly to forthcoming interest rate 
resets on hybrid ARMs. 

* In a 2007 study, Cagan estimated that about 13 percent of ARMs (1.1 
million loans) originated from 2004 through 2006 would foreclose over a 
6- to 7-year period as a result of interest rate resets.

* The extent to which current default and foreclosure trends continue 
depends on a number of factors, including lendersï¿½ willingness to 
modify loan terms, the amount of liquidity available for refinancing, 
changes in home prices and interest rates, and general economic 
conditions.

Developments Associated with Recent Trends Overview: 

A number of studies and industry data indicate that a combination of 
economic and market developments contributed to recent default and 
foreclosure increases, including: 

* the rapid decrease in home price appreciation (HPA) throughout much 
of the nation beginning in 2005 and weak labor market conditions in 
certain states;

* an easing of underwriting standards and wider use of certain loan 
features that, while potentially helping to expand homeownership, also 
reduced the likelihood that some borrowers would be able to meet their 
mortgage obligations, particularly in times of economic hardship or 
limited HPA; and,

* growth in the private label RMBS market, which provided liquidity to 
some brokers and lenders to support more aggressive lending practices.

Other developments may have played a role, but additional information 
would be needed to fully assess their impact. 

Developments Associated with Recent Trends Decline in HPA: 

Rapid HPA from 2003 into 2005 (which has been associated with several 
factors, including low interest rates, expectation of continued price 
increases, and a plentiful supply of credit) likely helped to mitigate 
defaults and foreclosures. 

* Growth in homeowner equity created incentives for borrowers to keep 
their mortgages current.

* Borrowers could refinance or sell their homes to avoid default or 
foreclosure. 

According to industry researchers, the stagnation or decline in home 
prices in much of the country beginning in 2005 changed this scenario. 

* Borrowers lost this ï¿½equity cushionï¿½ and had more difficulty 
refinancing or selling their homes.

* Borrowers, especially those who had purchased homes 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. 

Several factors may have contributed to the slowdown in HPA, including 
a rising supply of homes and a decline in speculative activity. 

Figure: Developments Associated with Recent Trends Decline in HPA: 

States with a sharp drop-off in HPA following a period of strong growth 
generally experienced larger percentage increases in foreclosure start 
rates. 

[See PDF for image]-graphic text: 

This is a line and bar combo chart with one line showing the HPI 
ration, and the bars showing the percentage change in forclosure start 
rate. 

Source: GAO analysis if data from MBA and the Office of Federal Housing 
Enterprise Oversight (OFHEO). 

Note: The HPI ratio is the ratio of (1) the projected OFHEO house price 
index for purchase transactions, assuming average Q3 2003 ï¿½ Q1 2006 
appreciation continued through Q2 2007 to (2) the actual OFHEO house 
price index as of Q2 2007. The figure covers the 25 states with the 
highest HPI ratio. 

[End of figure] 

Recent analysis has examined the relationship between HPA and loan 
performance.

* Zandi et al (2007) estimated that changes in HPA explained about 
three-quarters of the nationwide increase in mortgage delinquency rates 
from the fourth quarter of 2005 through the first quarter of 2007.

* The Federal Reserve Bank of San Francisco (2007) found a strong and 
statistically significant relationship between increases in delinquency 
rates on subprime loans from 2005 through 2006 and house price 
deceleration. The analysis covered 309 metropolitan areas and 
controlled for changes in economic conditions.

Developments Associated with Recent Trends Weak Regional Labor Market 
Conditions: 

Job loss is a common ï¿½trigger eventï¿½ that can lead to default and 
foreclosure because of its direct impact on a borrowerï¿½s ability to 
make mortgage payments. 

Although the national unemployment rate is relatively low and has 
declined in recent years, parts of the industrial midwest have 
experienced job losses, particularly in the manufacturing sector.

* Michiganï¿½s rate of employment growth from the fourth quarter of 2001 
(the end of the last recession) through the second quarter of 2007 was -
4.6 percent, the worst in the nation.

* The corresponding figure for Ohio was -0.9 percent, the second worst. 

From the second quarter of 2005 through the second quarter of 2007, 

* Michigan had the third highest rate of foreclosure starts for most of 
the period and the third largest increase in the total number of 
foreclosure starts (behind California and Florida).

* Ohio had the second highest rate of foreclosure starts (behind 
Indiana) throughout the period and the sixth largest increase in the 
total number of foreclosure starts.

Developments Associated with Recent Trends Weak Regional Labor Market 
Conditions: 

Zandi et al (2007) estimated that employment growth trends in certain 
metropolitan areas explained a substantial portion of the change in 
mortgage delinquency rates in certain metropolitan areas from the 
fourth quarter of 2005 through the first quarter of 2007, but had 
little impact nationally. 

* Negative employment growth explained about 32 percent of the change 
in delinquency rates in Detroit-Livonia- Dearborn, Michigan, and 20 
percent of the change in Cleveland-Elyria-Mentor, Ohio. 

In a separate analysis of securitized subprime loans, Zandi et al 
(2007) found that erosion in labor market conditions `increased 
foreclosure rates. 

Developments Associated with Recent Trends Easing of Underwriting 
Standards and Wider Use of Certain Loan Features: 

* Strong house price appreciation in much of the country beginning in 
2003 made home purchases less affordable for many buyers.

* According to several industry observers and participants, an 
increasingly competitive environment led lenders to lower underwriting 
standards and offer products that lowered monthly payments, which in 
turn helped feed housing price appreciation.

* According to the Office of the Comptroller of the Currencyï¿½s Survey 
of Credit Underwriting Practices (October 2006), the 73 large banks 
surveyed reported ï¿½a third consecutive year of easing underwriting 
standards, as banks continued to stretch for volume and yield.ï¿½

Developments Associated with Recent Trends Easing of Underwriting 
Standards and Wider Use of Certain Loan Features: 

The easing of underwriting standards and wider use of certain loan 
features, as evidenced by data on private label securitized mortgages 
(representing about 56 percent of RMBS issuances in 2006), resulted in 
more loans with features that may increase the risk of default and 
foreclosure. 

Higher loan-to-value (LTV) ratios (i.e., the amount of the loan divided 
by the value of the home): 

* As we reported in February 2005, a substantial amount of research 
indicates that LTV ratio is one of the most important factors in 
assessing mortgage risk. 

* The higher the LTV ratio, the less cash borrowers will have invested 
in their homes and the more likely it is that they may default on 
mortgage obligations, especially during times of financial hardship. 

Piggyback loans: 

* Borrowers use these to finance all or part of their down payment, 
which can result in higher combined LTV (CLTV) ratiosï¿½that is, the LTV 
ratio taking both the first mortgage and piggyback loan into account. 

Developments Associated with Recent Trends Easing of Underwriting 
Standards and Wider Use of Certain Loan Features: 

[See PDF for image]-graphic text: 

These are two line combo charts. The first graph is showing the average 
CLTV radio (purchases only). The other is showing the percentage 
represented by mortgages with piggybank loans. The lines illustrate 
jumbo, alt-A, and subprime. 

Source: UBS analysis data from LoanPerformance. 

Note: Loan characteristics are for mortgagers originated in the year 
indicated and pooled into private label securities. The CLTV figure 
reflects purchase loans only, whole the piggyback loan figure reflects 
both purchase and finance loans. The percentage in the figure on 
piggyback loans represent the dollar amount of first line mortgages 
with an associated piggyback loan. In dollar terms, jumbo, Alt-A, and 
subprime mortgages represented about 19, 16, and 24 percent of mortgage 
originations in 2006 (excluding home equity loans), respectively. 

[End of figure]  

Developments Associated with Recent Trends Easing of Underwriting 
Standards and Wider Use of Certain Loan Features: 

* Adjustable interest rates: 

- ARMs are generally considered to carry a higher default risk than 
otherwise comparable FRMs, in part because borrowers are subject to 
higher payments if interest rates rise. ï¿½ Hybrid ARMs can lead to 
ï¿½payment shockï¿½ for some borrowers because of interest rate adjustments 
following the initial fixed- rate period.

* Prepayment penalties: 

- Can be an obstacle to refinancing because borrowers must pay a 
penalty if they pay off the original loan before the prepayment period 
expires.

Figure: Developments Associated with Recent Trends Easing of 
Underwriting Standards and Wider Use of Certain Loan Features 

[See PDF for image]-graphic text: 

These are line combo charts representing percentage represented by 
ARMs, percentage represented by 2/28 hybrids, and percentage 
represented by loans with prepayment penalties. Within the charts, the 
lines represent jumbo, alt A, and subprime. 

Source: UBS analysis of data from LoanPerformance. 

Note: Percentages represent the dollar amount of purchase and refinance 
mortgages originated in the year indicated and pooled into private 
label securities that have certain characteristics. In dollar terms, 
jumbo, Alt-A, and subprime mortgages represented about 19, 16, and 24 
percent of mortgage originations in 2006 (excluding home equity loans), 
respectively. 

[End of figure] 

Developments Associated with Recent Trends Easing of Underwriting 
Standards and Wider Use of Certain Loan Features: 

Limited or no documentation of income or assets, 

* Allows borrowers to provide less detailed financial information than 
traditionally required. 

* Originally intended for borrowers who may have difficulty documenting 
income, such as the self-employed. 

* Problematic if borrowers or loan originators overstate income or 
assets to qualify borrowers for mortgages they cannot afford. 

High debt service-to-income ratio (the percentage of a borrowerï¿½s 
income that goes toward paying all recurring debt payments) 

* The higher the ratio, the greater the risk the borrower will have 
cash-flow problems and miss mortgage payments. 

Figure: Developments Associated with Recent Trends Easing of 
Underwriting Standards and Wider Use of Certain Loan Features: 

[See PDF for image]--graphic text: 

These are two line combo charts showing the percentage represented by 
loans with no law documentation, and percentage represented by loans 
with debt service-to-income ratios >40%. The three lines show jumbo, 
alt-A, and subprime. Percentage and years are compared. 

Source: UBS analysis of data from LoanPerformance. 

Note: Percentages represent the dollar amount of purchase and refinance 
mortgages originated in the year indicated and pooled into private 
label securities that have certain characteristics. In dollar terms, 
jumbo, Alt-A, and subrprime mortages represented about 19, 16, 24 
percent of mortgage originations in 2006 (exliding home equity loans), 
respectively. 

[End of figure] 

Developments Associated with Recent Trends Easing of Underwriting 
Standards and Wider Use of Certain Loan Features: 

Deferred payment of principal or interest: 

* As we reported in September 2006, interest-only loans and loans with 
payment options that allow for negative amortization (by adding 
deferred interest payments to the loan balance) can lead to payment 
shock when the interest-only or payment-option period expires. 

* Borrowers may build less home equity than they would with a 
traditional loan.

* Borrowers may not be well-informed about the risks of these products, 
due to their complexity and because promotional material by some 
lenders and brokers do not provide balanced information on the risks 
and benefits.

Figure: Developments Associated with Recent Trends Easing of 
Underwriting Standards and Wider Use of Certain Loan Features:  

[See PDF for image]-graphic text: 

These are two line charts representing percentage represented by 
interest-only loans, and percentage represented by loans with negative 
amortization feature. The lines are Jumbo, Alt-A, and Subprime. 
Percentages and years are compared. 

Source: UBS analysis of data from LoanPerformance. 

Note: Percentages represent the dollar amount of purchase and refinance 
mortgages originated in the year indicated and pooled into private 
label securities that have certain characteristics. In dollar terms, 
jumbo, Alt-A, and subprime mortgages represented about 19, 16, and 24 
percent of mortgage originations in 2006 (excluding home equity loans), 
respectively. 

[End of figure] 

Developments Associated with Recent Trends Easing of Underwriting 
Standards and Wider Use of Certain Loan Features: 

Several econometric studies have examined the relationship between some 
of the previously noted loan features and loan performance, 
particularly among subprime mortgages. For example:

* Danis and Pennington-Cross (forthcoming) found that for fixed-rate 
securitized subprime loans (1) higher LTVs and the presence of 
prepayment penalties were positively correlated with default and (2) 
that loans with limited or no documentation had substantially higher 
default and foreclosure rates than full documentation loans.

* Quercia et al (2005) found that securitized subprime refinance loans 
with prepayment penalties were more likely to experience a foreclosure 
than loans without such penalties.

* The Center for Responsible Lending (2006) found that securitized 
subprime loans with features such as adjustable rates, prepayment 
penalties, and no or low documentation had a higher likelihood of 
default than loans without those features, controlling for differences 
in borrower credit scores. 

* Zandi et al (2007) estimated that rising debt-service burdens 
explained about 9 percent of the change in mortgage delinquency rates 
nationally and 18 percent in California from the fourth quarter of 2005 
through the first quarter of 2007. 

Figure: Developments Associated with Recent Trends Easing of 
Underwriting Standards and Wider Use of Certain Loan Features: 

Many recent Alt-A and subprime loans were originated with multiple 
features that are associated with a greater risk of delinquency, a 
practice known as risk layering. 

FitchRatings analysis of securitized subprime loans from 2005 shows the 
impact of risk layering on mortgage delinquency rates after 1 year of 
seasoning. 

[See PDF for image]-graphic text:  

This is a bar graph with a group of four bars. Different loan groups 
are shown by the bars and the relative increase as a percentage in 60+ 
day of delinquency. Shading shows the feature present for the piggyback 
loan and no low documentation, as well as the feature not shown for the 
piggyback loan and no low documentation. 

Source: FitchRatings. 

[End of figure] 

Developments Associated with Recent Trends Growth in Private Label RMBS 
Market: 

* As previously noted, the increase in defaults and foreclosures has 
been concentrated among subprime loans, and to a lesser extent Alt-A 
loans, which are primarily pooled into private label RMBS (as opposed 
to Ginnie Mae or GSE securities). 

* From 2002 to 2006, the share of private label RMBS comprised of 
subprime and Alt-A loans increased from 43 percent to 71 percent by 
dollar volume.

* Investors were attracted to these securities because of their 
seemingly high risk-adjusted returns.

Figure: Developments Associated with Recent Trends Growth in Private 
Label RMBS Market: 

* The dollar volume of private label RMBS grew rapidly beginning in 
2003, while Ginnie Mae and GSE volume fell sharply. The market share 
for private label RMBS surpassed the combined market shares of Ginnie 
Mae and the GSEs in 2005. 

[See PDF for image]-graphic text: 

These two line charts are showing the increase and decline of Ginnie 
Mae and GSE, and private label RMBS. 

Source: GAO analysis of data from Inside Mortgage Finance. 

[End of figure] 

Developments Associated with Recent Trends Growth in Private Label RMBS 
Market: 

As demand for private label RMBS grew, investment banks structured and 
credit rating agencies rated securities in an environment of declining 
underwriting standards, providing continued liquidity for subprime and 
Alt-A lending. 

Officials from investment banks and credit rating agencies indicated 
that they increased RMBS loss coverage levels in response to declining 
underwriting standards. However, they also acknowledged that they were 
surprised by the speed and severity of HPA declines and underestimated 
the risk of certain loan features such as low and no documentation and 
high LTV ratios. In mid-2007, credit rating agencies made changes to 
their ratings methodologies to reflect the worse-than-expected 
performance of subprime and Alt-A loans in particular.

* Moodyï¿½s Investors Service increased default and loss assumptions by 
up to 25 percent for mortgages with low or no documentation, high LTVs, 
or piggyback loans.

* FitchRatings revised its ratings methodology to, among other things, 
place greater emphasis on regional economic risk and increase default 
assumptions for hybrid ARMs. 

Recent credit rating downgrades for RMBS have affected a relatively 
small portion of total private label RMBS issuances and have largely 
been limited to lower-rated securities.

* Standard & Poorï¿½s and Moodyï¿½s downgraded securities representing 
about 1 percent of the value of recently issued first-lien subprime 
RMBS rated by the agencies.

* None of these downgrades affected triple-A securities. 

* However, downgrades of second-lien subprime RMBS have been more 
extensiveï¿½for example, Moodyï¿½s has downgraded about 60 percent of the 
dollar volume of these types of securities that it rated in 2006.

Rating downgrades introduced uncertainty about the credit quality of 
subprime RMBS, contributing to financial market disruptions that 
reduced . liquidity for borrowers seeking to refinance out of loans at 
risk of default or foreclosure.

Developments Associated with Recent Trends Other Possible Factors: 

Other developments may have played a role in recent default and 
foreclosure increases, but additional information would be needed to 
fully assess their impact. 

Misaligned Incentives and Lack of Accountability in the Origination . 
and Distribution of Mortgages: 

* Some industry participants and observers have linked the declining 
credit quality of loans in recent years to market changes that have 
reduced incentives and accountability for prudent underwriting. 

* Until the 1990s, lenders held most loans on their balance sheets, so 
the same entity that originated the loan and created the risk bore . 
the risk.

In recent years, lenders and mortgage brokers originated loans that 
were quickly sold down a chain of aggregators and investors. 

* Originators had financial incentives to increase loan volume, 
potentially at the expense of loan quality. As lenders sold loans on 
the secondary market, the risks were passed on to investors. 

* The private label RMBS market had more lenient underwriting standards 
than the Ginnie Mae and GSE portions of the secondary market. 

* Some originators, particularly independent mortgage companies, lacked 
sufficient capital to make good on representations and warranties 
designed to protect investors from imprudent and fraudulent lending 
practices. 

The role of mortgage brokers has grown in recent years. 

* By one estimate, the number of brokerages rose from about 30,000 
firms in 2000 to 53,000 firms in 2004. 

* In 2005, brokers accounted for about 60 percent of originations in 
the subprime market (compared with about 25 percent in the prime 
market). 

Developments Associated with Recent Trends Other Possible Factors

Federal Regulation of Lenders: 

Concerns exist that certain lenders (e.g., independent mortgage 
companies and nonbank subsidiaries of banks, thrifts, or holding 
companies) that are not subject to routine monitoring and examination 
by federal bank regulators may tend to originate lower-quality loans. 

* Of the top 25 originators of subprime and Alt-A loans in 2006 (which 
accounted for over 90 percent of the dollar volume of all such 
originations): 

- 21 were nonbank lenders, including 14 independent lenders and 7 
nonbank subsidiaries of banks, thrifts, or holding companies. 

- the 21 nonbank lenders accounted for 81 percent of the dollar volume 
(44 percent was originated by independent lenders and 37 percent by 
nonbank subsidiaries of banks, thrifts, or holding companies). 

* In prior work, we have raised concerns about nonbank lenders, noting 
that some have been targets of some of the most notable federal and 
state enforcement actions involving abusive lending.

However, there has been limited analysis of differences in the 
performance of subprime loans made by bank and nonbank lenders. 48
Developments Associated with Recent Trends Other Possible Factors

Mortgage Fraud: 

Some industry participants and researchers have said that mortgage 
fraud has been a contributing factor in recent default and foreclosure 
trends. 

* Subprime and Alt-A mortgages, which comprise a substantial portion of 
recent default and foreclosure increases, may be more likely to involve 
fraud because substantial percentages of these loans required no or 
little documentation or verification of income and assets, providing 
opportunities to misrepresent this information. 

* According to the Mortgage Asset Research Institute, the number of 
reported cases of mortgage fraud increased from about 3,500 in 2000 to 
about 28,000 in 2006. 

- Florida and California, the states with the highest incidence of 
reported mortgage fraud in 2006 (adjusted for loan volume), also 
experienced among the largest percentage increases in foreclosure start 
rates from the second quarter of 2005 through the second quarter of 
2007. 

* According to some industry researchers, growth in early payment 
defaults in recent years (i.e., defaults occurring within a few months 
of loan origination) are an indicator of increasing mortgage fraud.

Interest Rates: 

Rising interest rates can increase the probability of default and 
foreclosure for borrowers with adjustable-rate mortgages because their 
monthly payments grow as rates climb. 

* The Federal Open Market Committee raised the federal funds rate from 
1 percent to 5.25 percent from 2004 through 2006 (although it has since 
reduced it to 4.75 percent). 

* Major rate indexes used to set adjustable-rate mortgages followed 
this upward trend, while long-term mortgage rates did not increase 
until late 2005.

* Zandi et al (2007) estimated that changes in interest rates explained 
a modest portion (about 6 percent) of the change in delinquency rates 
for all mortgage loans from the fourth quarter of 2005 through the 
first quarter of 2007.

[End of slide presentation] 

[End of section] 

Enclosure II: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

David G. Wood, (202) 512-8678 or [email protected]: 

Staff Acknowledgments: 

In addition to the individual named above, Steve Westley (Assistant 
Director), Kevin Averyt, Steve Brown, Marta Chaffee, Steve DelGrosso, 
Randy Fasnacht, Marc Molino, and Jim Vitarello made key contributions 
to this report. 

[End of section] 

Enclosure III - Selected Bibliography: 

Cagan, C. "Mortgage Payment Reset: The Issue and the Impact." First 
American CoreLogic, Inc. (Santa Ana, California: March 19, 2007). 

Danis, M., and A. Pennington-Cross. "The Delinquency of Subprime 
Mortgages." Journal of Economics and Business (forthcoming). 

Doms, M., F. Furlong, and J. Krainer. "House Prices and Subprime 
Mortgage Delinquencies." Federal Reserve Bank of San Francisco Economic 
Letter No. 2007-14 (June 2007). 

GAO, Alternative Mortgage Products: Impact on Defaults Remains Unclear, 
but Disclosure of Risks to Borrowers Could Be Improved, GAO-06-1021 
(Washington, D.C.: Sept. 19, 2006). 

GAO, Consumer Protection: Federal and State Agencies Face Challenges in 
Combating Predatory Lending, GAO-04-280 (Washington, D.C.: Jan. 30, 
2004). 

GAO, Federal Housing Administration: Decline in the Agency's Market 
Share Was Associated with Product and Process Developments of Other 
Mortgage Market Participants, GAO-07-645 (Washington, D.C.: June 29, 
2007). 

GAO, Mortgage Financing: Actions Needed to Help FHA Manage Risks from 
New Mortgage Loan Products, GAO-05-194 (Washington, D.C.: Feb. 11, 
2005). 

Pavlov, A., and S. Wachter. "Aggressive Lending and Real Estate 
Markets." Samuel Zell and Robert Lurie Real Estate Center Working 
Paper, Wharton School, University of Pennsylvania. (Apr. 10, 2007). 

Quercia, R., M. Stegman, and W. Davis. "The Impact of Predatory Loan 
Terms on Subprime Foreclosures: The Special Case of Prepayment 
Penalties and Balloon Payments." Center for Community Capitalism, Kenan 
Institute for Private Enterprise, University of North Carolina at 
Chapel Hill (Jan. 25, 2005). 

Schloemer, E., W. Li, K. Ernst, and K. Keest. "Losing Ground: 
Foreclosures in the Subprime Market and Their Cost to Homeowners." 
Center for Responsible Lending. (Durham, North Carolina: December 
2006). 

Zandi, M., T. Hughes, J. Licari, and A. Faucher. "Into the Woods: 
Mortgage Credit Quality, Its Prospects, and Implications." Moody's 
Economy.com. (West Chester, Pennsylvania: July 2007). 

[End of section] 

Footnotes: 

[1] Although definitions vary, a mortgage loan is commonly considered 
in default when the borrower has missed three or more consecutive 
monthly payments (i.e., is 90 or more days delinquent). At this point, 
foreclosure proceedings against the borrower become a strong 
possibility. Foreclosure is a legal, and often lengthy, process with 
several possible outcomes, including that the borrower sells the 
property or the lender repossesses the home. Unless noted otherwise, we 
treat loans in default and loans in foreclosure as mutually exclusive 
categories. 

[2] We excluded home equity loans from our calculation of market 
shares. Percentages do not add to 100 due to rounding. A graph showing 
market shares for the various market segments from 2001 through 2006 
appears in slide 11 of enclosure I. 

[3] NDS data do not separately identify Alt-A loans but include them 
among loans in the prime and subprime categories. State-level breakouts 
are based on the address of the property associated with each loan. The 
NDS presents default and foreclosure rates (i.e., the number of loans 
in default or foreclosure divided by the number of loans being 
serviced). 

[4] Fannie Mae and Freddie Mac are congressionally chartered, private 
corporations that are publicly owned that purchase mortgages from 
lenders. To be eligible for purchase by the GSEs, loans (and borrowers 
receiving the loans) must meet specified criteria. 

[5] In the second quarter of 2005, foreclosure start rates began to 
rise after remaining relatively stable for about 2 years. 

[6] The HPI measures movements in the price of single-family homes 
relative to a base period.

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