The rapid succession of mortgage banking failures is nearing an end, according to a new study.
Despite the demise decline, "investors have abandoned all private mortgage-backed securities, causing new mortgage market turmoil, even though most lenders who started the crisis have disappeared," SMR Research Corp. said its 250-page study, The Mortgage Credit Crisis, indicated.
The report measured credit risk for the 163 largest U.S. mortgage lenders against a national average score of 1,000, SMR said. Nearly all lenders with scores above 1,750 were already bankrupt, while eight of the 10 biggest lenders had low risk scores.
"The companies whose underwriting errors caused their own demise are largely gone or are well-known to be among the 'walking wounded'," SMR President Stuart A. Feldstein said in the statement. "Risk layering" -- the practice of making loans to people with multiple types of risks -- was a central cause of the credit crisis."
The study, which was based on courthouse lien records and annual Home Mortgage Disclosure Act data, factored in six credit criteria, including combined loan-to-values, the subprime portion of total originations and the Alt-A share, SMR noted. In addition, piggyback financing, adjustable-rate originations and the use of teaser rates were also considered. CLTVs were given the most weight.
"High-CLTV lending just prior to the national home price decline caused the sharp rise in foreclosures, even more than lending to borrowers with low credit scores," Feldstein added.
Among the 10 largest lenders, Bank of America -- at 465 -- had the lowest risk score, according to the announcement. HSBC had the highest risk score among the group, at 1,444, followed by Countrywide Financial Corp., with a 1,016 score that was slightly above the average level of risk.
Defunct lender SouthStar Funding LLC, with a risk score of 2,704, reportedly had the highest risk score of all companies reviewed. The Atlanta-based lender, which reported $4 billion in 2004 originations, notified its mortgage broker customers nearly four months ago that it was out of business.
Programs for borrowers with credit scores down to 540 for up to 100 percent LTV helped the former lender to become one of the 500 fastest-growing privately-held U.S. companies in 2005 according to Inc. magazine.