by Calculated Risk on 8/30/2006 04:49:00 PM

Via the Contra Costa Times: Subprime mortgages see early defaults

More subprime borrowers are defaulting in the early months of their home loans ... in recent months, an increasing number of lenders catering to borrowers with weak credit have reported a sharp rise in delinquencies that had occurred as soon as six months after origination.

Nationwide, about 3 1/2 subprime loans out of every 10,000 originated between January and June had a delinquency on their first monthly payment ... only one out of every 10,000 subprime loans granted last year had experienced missed payment in their first month. ...

"If those borrowers are finding themselves in trouble very early on, it may give lenders an indication that the underwriting criteria or quality control are not sufficiently tight," says Damien Weldon, director of collateral risk analytics at LoanPerformance. ...

So far no real surprise, but ...

Those early defaults have forced lenders such as NetBank Inc., Fremont General Corp. and H&R Block Inc. to buy back loans already sold to whole-loan acquirers, particularly Wall Street investment banks that pool and package those loans into asset-backed securities and then sell them to large investors such as insurance companies and hedge funds. The buybacks, in turn, have led lenders to incur losses and set aside more money in their reserve funds for potential loan repurchases in the future.

These buybacks are interesting. I wonder how many loans these subprime lenders might be forced to buy back?

... H&R Block told investors ... "an increase in early payment delinquencies" and the resulting "higher level of repurchase requests from loan buyers" led it to increase its loan reserves. ...