- 60% of the loans closed with second-lien financing.
That 60% segment of borrowers had zero equity in their homes at the time of closing. (First lien loans in the MASTR pool financed 80% of the appraised value, while some other second lien-lenders financed the remaining 20%.) In the overall pool, the combined loan to value was 92%.
- 58% of the loans relied on "stated documentation," meaning that the originator placed a phone call to verify that the loan applicant worked where he said he did. No income or net worth was ever verified.
- 55% of the loans were in California, where home prices had risen by 50% in the prior 24 months;
- The loan originator was New Century Financial, an unregulated mortgage lender in California. To qualify for New Century's best category of credit risk, a customer with a 550 FICO score could file for a Chapter 7 bankruptcy one day before mortgage closing.
Now consider a deal issued by Lehman Brothers in September 2005, Structured Asset Securities Corporation Mortgage Pass-Through Certificates, Series 2005-WF4. At first blush, the capital structure looks only slightly different, at the margins.
Yet in this deal:
- 15% of the loans were interest-only,
- 74% were adjustable rate
- 5% closed with second liens,
- 93% of the loans had full documentation
- 14% of the loans were in California, the highest concentration of any state.
- The loan originator was Wells Fargo Bank. Unlike New Century, which was not subject to any real regulatory oversight, Wells Fargo was required by law to confirm the source of funds for any down payment on a prospective buyer's new home. A lot of home flipping schemes involved down payments with laundered money.
- 73% of the loans had prepayment penalties.
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