Friedman Billings Ramsey released another positive report on the state of underwriting in residential mortgage loans in which its author, Michael Youngblood, FBR's head of ABS research, is sure will be controversial. Youngblood said the concept of deteriorating mortgage loan underwriting is generally unfounded and "a source of some wonderment that at least a significant part of the media world has grasped onto." (See related story p. 14).
"I never thought that Kool-Aid was this popular," Youngblood said. "I literally cannot fathom it. I would think that the uninformed are grasping at plausible but false explanations - market participants are generally dumbfounded by all of the hoopla," he added.
The erosion of residential mortgages, particularly in the subprime space, is soliciting a substantial amount of attention from market participants, some of whom have cited this as a reason for exiting from deals backed predominantly by RMBS. FBR's Youngblood, however, has largely defended the new, alternative products such as interest-only loans and option arms, saying the risk profiles of the products can actually be superior to those of traditional products.
FBR, itself a mortgage REIT, this year purchased Deerfield Beach, Fla.-based subprime mortgage lender First NLC Financial Services, for $101 million in cash and stock, and has ramped up its correspondent lending and mortgage trading activities. First NLC has issued two home-equity ABS to date, totaling $1.2 billion.
"There is no measurable erosion of the underwriting standards of single-family mortgage loans of any variety: conventional, prime, Alt-A, or subprime," Youngblood stated in a report released last week. "We find no quantitative evidence from any reliable source that underwriting standards in 1Q05 or 2004 changed for the worse. We uphold the primacy of quantitative evidence as a fundamental principle of finance: anecdote, rumor, and hearsay can never supplant it."
Among FBR's findings were that banks have generally not reported increased slackening of lending standards, and that LTVs are not at all-time highs.
FBR cited a Federal Reserve Board quarterly survey for the 1Q05, which found that 2.1% more commercial banks reported easing lending standards than those that reported tightening standards when originating mortgage loans. Over the past 40 quarters - from 3Q95 to the 1Q05 - banks surveyed by the Fed reported easing credit standards on mortgage loans in 14 quarters by an average of 3.6%, and reported tightening in 16 quarters, by an average of 4.3%. In 10 quarters, the surveyed banks reported no change. The highest number of banks reporting either tightening or loosening occurred in 1Q03, when 11.1% reported tightening, and in 2Q04, when 7.8% reported loosening of standards.
Although FBR does not identify the participating banks, in April, 54 domestic and 19 foreign banks responded.
Average LTV ratios over the past 27 years have been higher than the annual LTV in 2004, in 20 cities by an average of 2.4%, according to FBR, and the 2004 LTVs exceeded the 27-year average in 11 cities by an average of 1.4%.
"Lenders generally did not permit borrowers in the majority of these cities - by number and population - to incur the average leverage in 2004 that lenders have permitted borrowers to incur over the past 27 years," Youngblood stated.
From 1963 to 2004, the annual LTVs of loans made by institutions surveyed - 89 in April - by the Federal Home Loan Bank Board averaged at 75% for first mortgages. In the past decade, LTVs ranged from 73.5% in 2003 to 79.9% in 1994. In 2004 and in 1Q05, the LTVs were 74.9% and 75.6%, respectively, according to FBR.
Youngblood last month said the general characteristics of IO ARMs and hybrid ARMs are nearly indistinguishable, and where there are material differences, such as the borrower's credit score, the IO loans actually come out looking better, contrary to the skeptical views of the subprime IO loan by some market participants.
For example, the average FICO outstanding as of February for the IO product was 667, whereas the average FICO for a fully amortizing loan was a 626, he said, and early credit performance of IO loans is superior to fully amortizing loans with comparable loan-to-value ratios.
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