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Volume 4

Issue 1

June 2000

WHAT ABOUT

SUBPRIME MORTGAGES?

Research & Analysis

Office of Thrift Supervision

Washington, DC
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 1 June 2000

INTRODUCTION•

o the battle-scarred prime mortgage lenders who survived the oil 

patch disaster of the mid 1980s and the recession in the early 

1990s, lending money to borrowers with poor or non-existent 

credit histories might seem like a bad idea. But it is an idea whose time 

has come. According to the Mortgage Bankers Association, B&C mortgage originations1

 have risen from $86.4 billion in 1994 (11.2% of all 

home mortgage originations in that year) to $190 billion (14.8% of the 

total) in 1999. 

Technological advances in financial markets have enabled lenders to 

gather, analyze, and process more timely and accurate credit information. Lenders can now assess the risk and return of each loan more efficiently than ever before. They can increase the likelihood of repayment 

of higher risk loans with sophisticated monitoring tools. As a result, 

lenders have made billions of dollars in additional credit available to 

families that had previously faced very limited credit opportunities for 

buying a home. 

This rapid growth has not been without its casualties and controversies. 

Two recent well-publicized bank failures have been attributed to unsound subprime lending, although neither involved subprime first 

mortgages. And the market break of late 1998 led to the demise of a 

number of non-depository high loan-to-value lenders—close cousins of 

subprime lenders. As a result of these and other subprime lending 

losses, in March 1999, the bank regulators issued detailed guidance on 

managing subprime lending programs. More recently, the agencies have 

been considering whether specific increased capital requirements are 

appropriate.

OTS recently issued an Advanced Notice of Proposed Rulemaking 

(ANPR) on responsible alternative mortgage lending. The ANPR specifically identified subprime lending as an area of concern. OTS has 

generally taken a market-based approach to regulating the lending of its 

institutions, emphasizing full disclosure of terms and conditions, and 

letting consumers negotiate their best deal. However, OTS is questioning whether some subprime borrowers have access to the same information and options as borrowers in the traditional prime mortgage 

market, and as a result may not be in a position to negotiate effectively 

for themselves.

The subprime mortgage market thus presents an interesting conundrum. For most subprime borrowers and lenders, the market is a safe 

way to make sorely needed credit available at a return commensurate 

with the risk undertaken. Yet, there is a dark side. Some see subprime 

 

•

 Prepared by Fred Phillips-Patrick, Eric Hirschhorn, Jonathan Jones, and John 

LaRocca, Research & Analysis, Office of Thrift Supervision. Please email any 

comments or questions to fred.patrick@ots.treas.gov.

1

 B&C refers to credit quality. Prime mortgages are rated ‘A’. The volume cited 

includes first and second mortgages and home equity lines of credit.

T
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 2 June 2000

lending as a predatory market, with lenders making excessive profits at 

the expense of unwary borrowers. Others see it as a high-risk activity, 

exposing lenders to excessive losses, not excessive profits. Anecdotes 

support both contentions. However, the empirical data we’ve found 

suggest that the subprime market overall is a well-functioning, competitive market. The data will also show , though, that subprime loans are 

definitely not just prime loans with higher coupon rates. In this issue of 

Mortgage Market Trends, we will look at some characteristics of the subprime loans–composition, rates, and delinquency patterns, among others—as an introduction to this complex and rapidly changing market. 

Before we get started, let’s look at mortgage market conditions over the 

last half of 1999. 

CURRENT MORTGAGE MARKET CONDITIONS

Thrift Delinquency Rates Continue To Decline

igure 1 plots the percentage of seriously delinquent (90 days 

past-due or in foreclosure) residential mortgages, using both the 

Mortgage Information Corporation (MIC) prime mortgage data 

and Thrift Financial Report (TFR) data. The MIC prime mortgage data 

comprise almost 26 million mortgages. Since the first issue of the Mortgage Market Trends, we have divided the MIC data into two groups: the 

market, which includes all MIC participants (Freddie Mac, Fannie

Source: MIC and TFR. The Market contains the combined data of the depository and 

non-depository participants in MIC’s Loan Performance System. Depositories comprise 

both bank and thrift MIC participants. The thrift MIC participants are very large institutions located primarily on the East and West coasts. TFR represents all OTSregulated institutions except one that specializes in defaulted mortgages.

Mae, and 18 other large banks, thrifts, and private mortgage lenders), 

and a subgroup, depository institutions, which includes only the FDICinsured MIC participants (a mix of S&Ls and commercial banks). As 

the trend lines in Figure 1 show, depository and TFR delinquency rates 

have fallen since the end of 1998, continuing a long-term trend. However, the MIC market delinquency rate rose during the second half of 

1999, bringing it back to where it was at the end of 1998. Slightly higher 

delinquency rates among fixed-rate conventional mortgages and the 

F

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99

Depositories

TFR

Market

Figure 1: Percent Seriously Delinquent
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 3 June 2000

continuing rise in delinquency rates among government-backed mortgages contributed to its rise. 

Figure 1 also shows that depositories, as a group, have had a higher delinquency rate than the national average for the entire period. The gap 

between the depository and the market delinquency rates remained

fairly constant until the second half of this past year, when it narrowed 

because of a rise in the market rate. The thrift industry’s delinquency 

rate has declined steadily and since 1997 has dropped below the MIC 

market rate, which is heavily influenced by the portfolios of conforming mortgages held by Fannie Mae and Freddie Mac.

Figure 2 shows the regional detail behind the improvement in the overall delinquency rate for TFR reporters. Thrifts headquartered within 

OTS’s Northeast and West regions showed a small increase in delinquencies, but share the distinction of having the best performance 

among the regions. The Midwest region’s performance has steadily deteriorated over the last year, going from best performance to worst. All 

regions, however, continue to have very low rates.

Figure 2: Regional Delinquency Rates Among TFR Reporters

0.50%

0.70%

0.90%

1.10%

1.30%

1.50%

1.70%

1.90%

Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99

National NE SE Central Midwest West

Maryland, DC, and Hawaii Have Highest Delinquency Rates

n December 1999, according to the MIC data, the states with the 

highest rates of seriously delinquent prime mortgages (by dollar 

value) were Maryland (1.81%), the District of Columbia (1.62%), 

Hawaii (1.59%), New York (1.46%), and New Jersey (1.41%). The national average was 0.86%. California, which has previously drawn national attention because of its poor performance, had a rate of 0.79%, 

below the national average. Iowa (0.29%) and Nebraska (0.25%) had 

the lowest rates. 

In individual metropolitan statistical areas (MSAs), Memphis, TN, with 

a seriously delinquent rate of 2.25%, led the nation. It was followed by 

Riverside, CA (2.08%), and Scranton, PA (1.89%). Among major markets, Miami was fifth worst, with a rate of 1.81%. New York was 

I
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 4 June 2000

twelfth with a rate of 1.50%. The San Francisco metropolitan area, with 

a rate of 0.16%, had the lowest seriously delinquent rate in the nation.

Table 1 shows the percentage of mortgages that are seriously delinquent for different product types (conventional and governmentbacked, fixed-rate and adjustable-rate) based on whether the mortgages 

were made for purchase or for refinancing. These data show that fixedrate mortgages outperform adjustable-rate mortgages and 15-year fixedrate mortgages outperform 30-year fixed-rate mortgages. Refinanced 

mortgages perform much better than home purchase mortgages in all 

cases. 

Table 1: Percent Seriously Delinquent

Home 

Purchase

Refi

Conv: Fixed Rate 0.51 0.25

 15-Yr Fixed 0.16 0.11

 30-Yr Fixed 0.56 0.31

Conv: Adj Rate 0.79 0.69

 T-Bill 0.72 0.64

 COFI 1.01 1.01

Government 3.95 2.04

 FHA 4.19 1.91

 VA 3.26 2.30

All Loans 1.10 0.38

Source: MIC, based on $ amounts, 12/99

Delinquency rates on government-backed loans substantially exceed 

those on conventional loans. For home purchase mortgages, government-backed loans have a seriously delinquent rate seven times higher 

than that for 30-year conventional loans (3.95 vs. 0.56); for refinancing 

loans, the rate is 6.6 times higher (2.04 vs. 0.31).

Figure 3 presents a tale of two series, the performance of governmentbacked and conventional home purchase mortgages, over the last six 

years. The performance of government-backed mortgages (FHA and 

VA) becomes worse year-by-year. Four percent of the governmentbacked loans tracked by MIC are currently seriously delinquent. The 

Figure 3: Percent Seriously Delinquent, Government-backed 

and Conventional Home Purchase Mortgages, 1993-1999 

(Source: MIC)

0

0.5

1

1.5

2

2.5

3

3.5

4

1993 1994 1995 1996 1997 1998 1999

Government-Backed Conventional
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 5 June 2000

performance of conventional mortgages improves year-by-year. Currently only about one-half of a percent of conventional mortgages are 

seriously delinquent. The spread between the two grows ever wider. 

Interest Rates Rise Rapidly 

nterest rates rose quickly and sharply from their seven-year lows in 

October 1998 through the end of 1999. Figure 4 depicts the 

movement of key interest rates since January 1997.

The one-year constant maturity Treasury rate (1 Yr CMT) is frequently 

used as an index for adjustable-rate mortgages. The ten-year constant 

maturity Treasury rate (10 Yr CMT) serves as an overall risk-free reference rate for longer-term contracts. The FHLMC 30-day commitment 

rate for 30-year fixed-rate conforming mortgages provides a commonly 

used mortgage interest rate benchmark. 

During the period July through October 1998, domestic and worldwide 

events prompted a flight to safety that drove Treasury rates down 

sharply. Mortgage rates also fell, but not nearly as much. The rates rose 

in November 1998, declined slightly in December 1998, but have 

climbed steadily since then. 

The rapid decline in interest rates in 1998 prompted many homeowners 

to refinance into fixed-rate mortgages, especially in the second half of 

the year. But since the beginning of 1999, the rapid rise in rates, especially long-term rates, has made adjustable-rate mortgages much more 

attractive. In December 1999, the Federal Housing Finance Board’s 

Mortgage Interest Rates Survey shows that 78% of all mortgages originated 

by savings associations in that month were adjustable-rate. In contrast, 

as recently as February 1999, the percentage was only 36%.

SUBPRIME MORTGAGES

his section describes some data on subprime mortgages OTS 

has obtained from the Mortgage Information Corporation. 

MIC’s subprime mortgage system is a relatively new product 

and it is not yet as inclusive as their prime mortgage data. MIC’s subprime mortgage data include 1.8 million loans, with an aggregate value 

I

T

Figure 4: Interest Rates Since January 1997

4

4.5

5

5.5

6

6.5

7

7.5

8

8.5

Jan9 7Apr9 7Jul-97 Oct9 7Jan9 8Jun9 8Sep9 8Dec9 8Mar9 9Jun9 9Sep9 9Dec9 9

30 Yr Mortgage

10 Yr CMT

1 Yr CMT
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 6 June 2000

of $112 billion. This compares to MIC’s prime loan data that include 

26.6 million loans with an aggregate value of more than $2.6 trillion. 

The subprime data come from 27 lenders. The subprime data are as of 

September 1999.

The MIC Subprime Mortgage Database

IC’s subprime data are not as nationally representative as 

their prime mortgage portfolio data. These differences reflect 

the narrower range of lenders in the subprime data, and the 

varying amounts of subprime lending across the country. The subprime 

data show no loans in ten states: Alabama, Alaska, Louisiana, New 

Hampshire, North Carolina, North Dakota, Oklahoma, South Carolina, 

Tennessee, and Texas. The absence of subprime loans in Texas may reflect that state’s long-standing prohibition of home equity lending, 

which ended only recently.

Figure 5 shows the differences in the relative shares of prime and subprime loans across states. For example, California has 16.4% of all 

prime mortgages in the MIC database but only 12.2% of the subprime 

mortgages. Therefore, the figure shows California with a positive difference of 4.2%. The most notable differences are the relative underrepresentation of subprime loans in Texas, California, and North Carolina and the over-representation of subprime loans in Ohio, Florida, 

Indiana, Pennsylvania, and Michigan.

Table 2 shows the distribution of the MIC subprime loans by their 

origination year compared to MIC’s prime mortgages. The subprime 

loans are of much more recent vintage than the prime loans. Over twothirds of the subprime mortgages were originated in 1998 or 1999, 

compared to half of the prime loans. Less than seven percent of the 

subprime mortgages were originated in 1995 or earlier, compared to 

about one-third of the prime loans.

M

Figure 5: Differences in the State-By-State Relative 

Shares of Prime and Subprime Mortgages

AL

AK

AZ

AR

CO

CT

DEDC

FL

GA

HA

ID

IL

IN

IO

KS

KY

LA

ME

MD

MA

MI

MN

MS

MO

MTNENV

NH

NJ

NM

NY

ND

OH

OK

OR

PA

PR

RI

SC

SD

TN

TX

UT

VTVAWA

WV

WIWY

NC

CA

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Percent of prime - percent of subprime mortgages

States with positive differences have 

relatively few subprime mortgages.

Negative differences indicate relatively large 

numbers of subprime mortgages.
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 7 June 2000

The more “youthful” characteristic of the subprime mortgage portfolio 

is due in part to the subprime market’s more recent development. It 

also reflects a basic difference between subprime and prime loans. Subprime loans have higher prepayment rates than prime loans because 

their prepayments are driven by more factors than prime mortgages. 

Prime mortgage prepayments are largely determined by housing turnover and market interest rates declines that give borrowers a chance to 

refinance at lower rates. Subprime mortgages prepay not only because 

of these factors but also when borrowers have built up sufficient credit 

history or home equity to “move up” to higher quality or prime mortgages.

Table 3 shows the distribution of the MIC subprime loans by paper 

grade. Loan grades are self-determined and self-reported by the MIC 

participants. By dollar value, almost half of the subprime loans and 

over 60 percent of the total excluding the “other grade” category are 

graded A- (“other grade” generally refers to loans that are not graded). A- loans 

are a lower percentage of loans by number. The difference between the 

percentage of A- loans by dollar value and by the number of loans reflects the larger average size of A- loans (the average size of A- loans is 

$72,000, compared to $62,000 for all subprime loans). The percentage 

of loans in the lowest grades is very low, with about two percent graded 

D, both by dollar value and number of loans.

One of the key factors that differentiate subprime mortgages from 

prime mortgages is borrower creditworthiness. Table 4 shows the distribution of credit scores (FICO or FICO equivalent) for the MIC subTable 3: Distribution of Subprime Loans by Paper Grade

By Dollar Value By Number of Loans

$Millions Percent of 

graded loans

Number Percent of 

graded loans

A- 53,628 60.7 741,568 55.1

B 21,740 24.6 345,768 25.7

C 11,417 12.9 229,850 17.1

D 1,598 1.8 28,999 2.2

Total graded 88,383 100.0 1,346,185 100.0

Other grade 23,750 452,727

(‘Other grade’ includes largely ungraded subprime loans.)

Table 2: Distribution of Subprime and

Prime Mortgages by Origination Years

(By $ Volume)

Subprime 

Mortgages

Prime

Mortgages

1999 33.3% 19.2%

1998 36.2% 30.8%

1997 16.6% 10.0%

1996 7.1% 7.3%

1995 2.8% 5.2%

1994 1.6% 5.5%

1993 0.9% 11.9%

Pre-1993 1.6% 10.2%
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 8 June 2000

prime mortgages. Fewer than four percent of the subprime loans have 

credit scores over 720, as would be expected, since such high scores 

would normally qualify a borrower for a prime loan. Just over 15 percent of these loans have credit scores between 660 and 720, which 

would generally be considered moderate to good scores. One-third of 

the subprime loans have credit scores between 600 and 659, which indicates some problems, while almost another third fall into the range 

between 540 and 599, which indicates more significant credit impairment. Consistent with the paper grades, there are very few borrowers 

with extremely low credit scores.

The subprime mortgages in the MIC database have somewhat higher 

loan-to-value (LTV) ratios than MIC’s prime mortgages, but there are 

no subprime mortgages with LTVs over 90 percent in the database. 

This factor, in conjunction with the distribution of borrower creditworthiness described previously, indicates that these MIC subprime data 

exclude much of the bottom end of the subprime market. Hence, these 

data might not be useful for analyzing the most risky elements of subprime lending—very high LTV and very high credit risk loans. Almost 

90 percent of the MIC subprime mortgages are first liens.

Subprime Mortgage Delinquencies

egulators are concerned about subprime lending in part because 

it involves higher credit risk than traditional mortgage lending. 

While subprime mortgages may have higher default probabilities, they also have higher interest rates, which should compensate for 

their higher credit risk and administrative costs. Even if their higher interest rates fully compensate lenders for the higher average default 

rates, subprime mortgages might add to an institution’s overall risk if 

their default rate volatility is high enough or if they raise other concerns 

such as those relating to operational controls or liquidity.

The MIC data show that subprime mortgages have significantly higher 

delinquency rates than prime mortgages. Figure 6 shows the seriously 

R

Table 4: 

Distribution of Subprime Mortgages

 by Borrower Credit Score

(Based on $ Volume)

Credit score Percent

Under 400 0.02

400 to 479 1.1

480 to 519 6.2

520 to 539 7.5

540 to 559 9.9

560 to 579 11.2

580 to 599 11.8

600 to 619 12.1

620 to 639 11.5

640 to 659 9.7

660 to 679 7.2

680 to 699 4.8

700 to 719 3.2

Over 720 3.8
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 9 June 2000

delinquent rates for prime mortgages (A paper) and for A-, B, C, and D 

subprime mortgages with LTVs under 80 percent. Seriously delinquent 

rates are the percentages of loans that are over 90 days past due or in 

foreclosure. The delinquency rates increase steadily as grade declines.2

But even for A- subprime loans, the seriously delinquent rate is more 

than 10 times that for “A paper” loans with LTVs under 80 percent.

Figure 7 shows subprime mortgage delinquency rates for prime mortgages and for subprime mortgages with LTVs under 80% by credit 

score. The relationship between credit score and delinquency rates is 

analogous to that between paper grade and delinquency, with a steady 

increase as credit score declines.3

 

2The large jump in delinquency rates between mortgages rated C and D is due 

to large differences in their foreclosure rates. This may not represent the usual 

relationship because there are so few D-rated loans (less than $1.5 billion).

3The delinquency rate for loans with credit scores under 480 might not be precisely measured because of the small number of loans in this category. 

Figure 6: Percent Seriously Delinquent

22.0%

10.0%

6.3% 3.1% 0.3%

0%

10%

20%

30%

D C B A- A paper

Figure 7: Percent Seriously Delinquent

22.3%

14.8%

10.6%

8.0%

6.1%

4.7%

3.5% 3.2% 3.0% 2.6% 2.5% 1.6% 1.2% 1.3% 0.3%

0%

4%

8%

12%

16%

20%

24%

< 400 400 -

479 

480 -

519 

520 -

539 

540 -

559 

560 -

579 

580 -

599 

600 -

619 

620 -

639 

640 -

659 

660 -

679 

680 -

699 

700 -

720 

> 720 A paper
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 10 June 2000

Figures 6 and 7 imply that there is a relationship between paper grade 

and credit score, but there is considerable variability of credit scores 

among subprime mortgages in each grade level. The MIC subprime database aggregates credit scores into 20 point ranges. Figure 8 shows the 

75th percentile (top of the line), median, and 25th percentile (bottom of 

the line) of credit scores for each paper grade. For example, it shows 

that 25 percent of A- subprime mortgages had credit scores below the 

580-600 range, 25 percent had credit scores above the 660-680 range, 

and the median lies in the 620-640 range. MIC does not report credit 

scores for prime mortgages. 

Anecdotally, a credit score of 680 usually qualifies a borrower for consideration for a prime loan, whereas a score below 620 virtually eliminates that possibility. Forty percent of the MIC subprime loans have 

credit scores of 620 or higher. About 16 percent of the A- subprime 

mortgages in the MIC system have credit scores above 680, raising the 

question of whether these represent at least some potentially prime 

mortgage borrowers borrowing at subprime interest rates. Because 

other underwriting factors (not reported by MIC) are used in assessing 

the risk of a mortgage, we cannot determine whether overpricing exists, 

but the data certainly raise the issue. 

Breaking down the subprime mortgages between first and second liens, 

Figure 9 shows that first liens have higher delinquency rates than secFigure 9: Percent Seriously Delinquent, by Grade

21.6%

8.9%

6.2% 3.1%

12.5%

4.5% 3.3% 2.2%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

D C B A1sts 2nds

630

570

550 550

480

500

520

540

560

580

600

620

640

660

680

A- B C D

Figure 8: Credit Score Ranges--25th to 75th Percentiles, by 

Paper Grade, with Median Marked
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 11 June 2000

ond liens. This is a normal trait of subprime mortgage lending, reflecting the fact that some subprime second liens are junior to prime first 

mortgages. In these cases, the borrowers were able to qualify for prime 

first mortgages, suggesting that they are better credit risks than those 

with subprime first mortgages. The MIC subprime data tend to confirm

this, since the average credit score for second lien mortgages is higher 

than the average credit score for first liens.

Subprime Mortgage Interest Rates And Credit Risk

ince higher delinquencies generally yield higher credit losses, 

subprime loan portfolios are likely to incur larger losses than 

prime portfolios. But higher losses do not necessarily mean that 

subprime portfolios are less profitable. The lender’s bottom line depends on whether the interest rates charged compensate for the added 

risk and other administrative costs. All in all, subprime lending should 

have higher expected profits than prime lending because of its higher 

risk. The regulatory bottom line may be different from that of the 

lender, however. Even if the lender is compensated for additional credit 

risk, subprime lending may increase risk of failure and, therefore, may 

increase the expected cost to the deposit insurance system.

Figure 10: Average Coupon for Subprime Loans, By Grade

10.3 9.9 10.6 11.5

12.6

0.00

5.00

10.00

15.00

All subprime A- B C D

Figure 10 shows the average coupon rate for all (first and second lien) 

subprime loans originated in 1999, both in the aggregate and broken 

down by paper grade. As expected, the coupon rates for lower-quality 

loans are higher than those for the better-quality subprime mortgages. 

The rate differentials between subprime mortgages of different grades 

have been stable over the past few years. Table 5 shows the differentials 

between B, C, and D mortgages and A- mortgages by year of origination. The stability of these differentials may reflect in part both actual 

market conditions and MIC’s effort to use standardized measures of 

subprime credit quality. 

S

Table 5: Subprime Mortgage Coupon Rate Differentials 

from A- Mortgages By Origination Year

B C D

1999 0.74 1.62 2.71

1998 0.66 1.48 2.78

1997 0.63 1.49 2.71

1996 0.83 1.75 2.84

1995 1.03 1.80 2.45
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 12 June 2000

One final issue that we look at here is the relationship between coupon 

rates and delinquency rates for subprime mortgages. Figure 11 shows 

that delinquency rates increase fairly steadily for subprime loans with 

higher coupon rates, based on the number of loans. This relationship 

supports the view that subprime lenders are charging higher rates to 

riskier borrowers., although the lower delinquency rate at the highest 

interest rate may give some support to concerns about predatory lending. It is difficult to draw any firm conclusion, though, because there 

are so few loans in the database with coupons over 16 percent (less 

than 1 percent). 

Figure 11: Seriously Delinquent Rates, by Coupon

0.87% 1.45%

2.82%

4.74%

6.38%

7.76% 8.08%

8.57%

9.24%

8.57%

0.0%

2.5%

5.0%

7.5%

10.0%

<= 8 8 - 9 9 - 10 10 - 11 11 - 12 12 - 13 13 - 14 14 - 15 15 - 16 > 16

CONCLUSION

he growth in subprime mortgage lending means that more credit

has been made available to families that had previously faced 

very limited credit opportunities for buying a home. Technological advances in financial markets have enabled lenders to gather, analyze, and process more and better information. Lenders can now gauge 

risk and return more efficiently and effectively than ever before. Lenders have developed management systems that effectively increase the 

likelihood of repayment of these higher risk loans. And most of the 

evidence from the MIC subprime data is broadly consistent with a wellfunctioning market. Coupon rates, for example, increase steadily as 

grade and credit scores decline.

But subprime loans are not simply prime loans with a little more risk. 

The difference is not just the degree of risk but also the kinds of risk 

and their complexity. Subprime loans do default more frequently than 

prime loans. Subprime loans prepay both when interest rates decline 

and when credit worthiness improves. Prepayment risk is, therefore, 

greater for subprime loans. Unlike prime mortgages, older subprime 

mortgages can be riskier because, absent other factors rare in the prime 

market such as prepayment penalties, they would have been prepaid 

had the borrower’s credit improved. Thus, successful subprime lending 

requires strong management, effective internal controls, and risk management expertise. Recent subprime lender failures underscore the need 

T
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 13 June 2000

for proper controls and expertise, especially when entering a new and 

riskier product line.

Predatory pricing has also been raised as an issue in subprime markets. 

If subprime markets are competitive, the higher interest rates charged 

by lenders may be appropriate, given the additional credit risk the borrowers pose. But, with effective competition, borrowers will get the 

lowest rate for which they qualify. The operative term here is competitive markets. And banks and thrifts can play a role in making the subprime market competitive. As OTS Director Seidman noted recently, 

banks and thrifts that engage in responsible subprime lending offer 

“the most effective antidote” to predatory pricing.4 

 

4

 Speech to Interagency Conference on CRA, San Francisco, April 17, 2000.
Mortgage Market Trends

Volume 4 Issue 1

June 2000

Data Appendix

National and Regional Trends in Mortgage Delinquency Rates

For the Quarter ending:

September 30, 1999
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 15 June 2000

Regional and State Analysis

Seriously Delinquent & Home Price Appreciation Rates as of 9/30/99

(Based on $)

MIC SD TFR SD Home Price Appreciation

Market Depositories TFR 1-Year 5-Year

National 0.74 0.95 0.69 6.1 24.1

Northeast 0.98 1.29 0.63

Connecticut 0.69 0.87 0.46 6.3 16.4

Delaware 0.81 1.28 0.47 5.0 13.7

Maine 0.55 0.76 0.74 6.8 20.8

Massachusetts 0.38 0.52 0.33 12.0 35.0

New Hampshire 0.28 0.42 0.34 10.2 30.0

New Jersey 1.31 1.89 1.05 6.7 16.8

New York 1.37 1.53 0.58 8.1 17.9

Pennsylvania 0.94 1.41 0.65 3.6 13.4

Rhode Island 0.55 0.69 1.20 4.5 13.0

Vermont 0.34 0.59 0.84 5.5 12.6

West Virginia 0.49 1.34 1.09 4.3 20.5

Southeast 0.92 1.30 0.73

Alabama 0.67 1.39 1.12 3.3 23.3

DC 1.46 1.80 2.93 10.8 18.2

Florida 1.08 1.29 0.63 4.6 19.9

Georgia 0.75 1.09 0.64 7.4 32.2

Maryland 1.56 2.24 2.16 3.8 11.4

North Carolina 0.55 0.92 0.38 4.9 27.4

Puerto Rico 0.84 10.34

South Carolina 0.64 1.01 0.47 6.8 28.4

Virginia 0.64 0.89 0.28 4.9 15.5

Central 0.61 1.06 0.75

Illinois 0.87 1.18 0.68 4.9 19.7

Indiana 0.74 1.29 0.85 4.6 25.4

Kentucky 0.47 0.94 0.98 5.5 26.6

Michigan 0.26 0.43 1.23 8.4 43.1

Ohio 0.64 1.20 0.57 5.0 26.5

Tennessee 0.87 1.66 0.75 4.3 27.7

Wisconsin 0.28 0.64 0.27 6.4 26.6

Midwest 0.49 0.77 0.93

Arkansas 0.75 1.22 4.22 3.3 20.7

Colorado 0.27 0.39 0.13 10.1 39.1

Iowa 0.22 0.31 0.40 5.8 25.9

Kansas 0.40 0.70 0.27 7.3 28.6

Louisiana 0.88 1.37 0.33 5.1 27.2

Minnesota 0.26 0.39 0.30 10.6 35.6

Mississippi 0.67 1.70 1.18 4.7 25.4

Missouri 0.40 0.65 0.42 6.9 25.5

Nebraska 0.19 0.27 0.67 6.0 28.2

New Mexico 0.71 0.93 0.99 2.2 16.5

North Dakota 0.34 0.51 0.34 3.2 22.1

Oklahoma 0.68 1.09 0.17 5.5 22.5

South Dakota 0.36 0.48 0.49 4.5 24.2

Texas 0.66 1.00 1.61 6.3 19.8

West 0.67 0.68 0.61

Alaska 0.44 1.01 0.07 3.1 17.7

Arizona 0.49 0.61 0.55 5.8 29.2

California 0.70 0.69 0.66 7.1 20.9

Hawaii 1.60 2.26 1.57 -2.4 -13.1

Idaho 0.55 0.57 0.02 2.4 18.5

Montana 0.56 0.95 0.30 5.3 23.9

Nevada 1.08 1.09 1.12 2.1 14.8

Oregon 0.37 0.35 0.20 3.5 34.8

Utah 0.66 0.75 0.74 1.6 36.2

Washington 0.49 0.51 0.24 5.5 26.8

Wyoming 0.38 0.53 0.27 3.7 23.4
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 16 June 2000

OTS Regions

Seriously Delinquent Mortgages (%)

Based on Thrift TFR Data by Location of Headquarters

0.50%

0.70%

0.90%

1.10%

1.30%

1.50%

1.70%

1.90%

Sep-95 Mar-96 Sep-96 Mar-97 Sep-97 Mar-98 Sep-98 Mar-99 Sep-99

National NE SE Central Midwest West

Percent Home Price Appreciation

1998Q3 to 1999Q3

 (Source: OFHEO Resale Database)

9.1 to 12 (5)

6.2 to 9.1 (12)

3.3 to 6.2 (26)

0.4 to 3.3 (7)

-2.5 to 0.4 (1)
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 17 June 2000

National Cohort Performance by Quarter of Origination

 (Source: MIC, Percent Seriously Delinquent after 24 Months, All Loans) 

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Sep -94 M ar-95 Sep -95 M ar-96 Sep -96 M ar-97 Sep -97

O r i g in a t ion Quar te r

Home Purchase vs. Refinancing Mortgages

 (Source: MIC, Percent Seriously Delinquent, All Loans) 

0

0.2

0.4

0.6

0.8

1

1.2

1991 1992 1993 1994 1995 1996 1997 1998 1999Q3

Purchase

R e financing

Fixed Vs. Variable Rate Mortgages

(Source: MIC, Percent Seriously Delinquent, All Loans)

0

0.5

1

1.5

2

2.5

1991 1992 1993 1994 1995 1996 1997 1998 1999Q3

Variable

Fixed
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 18 June 2000

Mortgage Market Trends

Volume 4 Issue 1

June 2000

Data Appendix

National and Regional Trends in Mortgage Delinquency Rates

For the Quarter ending:

December 31, 1999
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 19 June 2000

Regional and State Analysis

Seriously Delinquent & Home Price Appreciation Rates as of 12/31/99

(Based on $)

MIC SD TFR SD Home Price Appreciation

Market Depositories TFR 1-Year 5-Year

National 0.86 0.93 0.68 6.4 26.1

Northeast 1.06 1.26 0.65

Connecticut 0.74 0.83 0.42 6.4 19.0

Delaware 0.93 1.19 1.08 6.6 17.7

Maine 0.56 0.72 0.53 8.6 26.3

Massachusetts 0.44 0.49 0.33 12.6 38.6

New Hampshire 0.32 0.31 0.20 10.4 32.8

New Jersey 1.41 1.90 1.07 6.5 19.3

New York 1.46 1.48 0.51 8.1 21.8

Pennsylvania 1.04 1.37 0.68 3.1 15.3

Rhode Island 0.65 0.64 1.08 3.5 14.6

Vermont 0.36 0.43 0.81 7.3 14.2

West Virginia 0.61 1.36 1.03 3.1 22.7

Southeast 1.10 1.29 0.75

Alabama 0.85 1.45 1.16 3.8 25.2

DC 1.62 1.61 2.91 7.6 23.9

Florida 1.24 1.27 0.71 4.1 21.3

Georgia 0.94 1.10 0.63 8.4 34.8

Maryland 1.81 2.21 2.12 5.0 15.4

North Carolina 0.74 0.98 0.38 5.4 27.7

Puerto Rico 1.00 9.72

South Carolina 0.77 1.00 0.50 5.4 27.9

Virginia 0.78 0.89 0.27 5.3 17.0

Central 0.74 1.06 0.73

Illinois 1.00 1.16 0.71 5.2 20.5

Indiana 0.89 1.30 0.85 4.5 26.3

Kentucky 0.57 0.98 1.01 5.8 27.3

Michigan 0.36 0.45 1.18 9.1 43.6

Ohio 0.77 1.25 0.55 5.0 26.8

Tennessee 1.07 1.73 0.70 4.1 28.9

Wisconsin 0.34 0.63 0.25 7.2 27.8

Midwest 0.60 0.75 0.71

Arkansas 0.84 1.19 4.05 3.1 20.3

Colorado 0.34 0.38 0.16 11.2 41.5

Iowa 0.29 0.32 0.28 6.8 27.3

Kansas 0.50 0.68 0.17 7.7 29.5

Louisiana 1.01 1.46 0.32 5.3 28.6

Minnesota 0.32 0.34 0.23 11.3 37.7

Mississippi 0.80 1.72 1.25 3.8 23.7

Missouri 0.47 0.63 0.44 7.5 26.8

Nebraska 0.25 0.31 0.64 6.9 30.0

New Mexico 0.88 1.05 1.28 2.6 16.5

North Dakota 0.40 0.62 0.36 2.0 20.1

Oklahoma 0.82 1.04 0.18 5.8 24.6

South Dakota 0.42 0.45 0.51 8.0 25.6

Texas 0.84 0.98 0.98 6.5 22.1

West 0.78 0.65 0.65

Alaska 0.52 1.10 0.14 2.3 18.6

Arizona 0.66 0.63 0.48 6.1 29.3

California 0.79 0.64 0.65 7.7 25.6

Hawaii 1.59 1.96 1.47 3.4 -7.3

Idaho 0.75 0.77 0.05 1.2 16.3

Montana 0.65 0.98 0.24 3.9 23.4

Nevada 1.36 1.19 1.10 1.2 14.6

Oregon 0.51 0.38 0.25 2.9 33.2

Utah 0.92 0.84 0.92 2.0 35.2

Washington 0.61 0.51 0.26 5.5 28.1

Wyoming 0.45 0.51 0.22 3.8 23.0
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 20 June 2000

OTS Regions

Seriously Delinquent Mortgages (%)

Based on Thrift TFR Data by Location of Headquarters

Percent Home Price Appreciation

1998Q4 to 1999Q4

 (Source: OFHEO Resale Database)

10.3 to 12.7 (4)

8 to 10.3 (4)

5.7 to 8 (16)

3.4 to 5.7 (16)

1.1 to 3.4 (11)

0.50%

0.70%

0.90%

1.10%

1.30%

1.50%

1.70%

1.90%

Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99

National NE SE Central Midwest West
Mortgage Market Trends Volume 4 Issue 1

Research & Analysis 21 June 2000

National Cohort Performance by Quarter of Origination

 (Source: MIC, Percent Seriously Delinquent after 24 Months, All Loans) 

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Jun-94 Dec-94 Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-97

O r i g in a tion Quar te r

Home Purchase vs. Refinancing Mortgages

(Source: MIC, Percent Seriously Delinquent, All Loans)

0

0 .2

0 .4

0 .6

0 .8

1

1 .2

1991 1992 1993 1994 1995 1996 1997 1998 1999

Purchase

Refinancing

Fixed Vs. Variable Rate Mortgages

(Source: MIC, Percent Seriously Delinquent, All Loans)

0

0 .5

1

1 .5

2

2 .5

1991 1992 1993 1994 1995 1996 1997 1998 1999

Variable

Fixed