Conforming loans originated last year are suffering from unusually high rates of serious delinquency, making them the worst-performing vintage since 1991.
And in an unusual twist, nonconforming loans originated during that period have achieved lower-than-expected delinquency rates.
After an 18-month seasoning, delinquencies of 90 days or more for both conforming and nonconforming loans are even at 0.21%, according to a study by San Francisco-based Mortgage Information Corp.
The high long-overdue rate for conforming loans does not comes as a shock to some analysts.
"The performance of 1994 (conforming) loans is not surprising," said Henry Hayssen, vice president of mortgage-backed securities, with Duff & Phelps Credit Rating Co. The company warned investors of the poor performance of vintage '94 conforming loans in a special report released earlier this year.
Several factors, including higher loan-to-value rates for 1994, an increase in the number of homes not occupied by owners, and cutthroat competition are at fault, according to most observers.
"We're attributing the majority of (poor performance) to the larger percentage of greater-than-80% LTV loans," said Ian Wong, marketing manager at Mortgage Information. Some 13% more loans with ratios of more than 80% were originated in 1994 than 1993, he said.
Lenders attempting to make up for the lull after the refinancing boom of 1992 and 1993 also contributed to the poor quality of conforming loans. During 1994, "we saw a decline in credit characteristics," said Bruce Harting, an analyst at Salomon Brothers Inc.
Not all small lenders agree. "Our standards did not change," said Wayne Simpson, vice president of loan servicing for First Tennessee National Corp. Instead, competing lenders in the Tennessee area cut prices, he said.
The Washington area was among the hardest hit, said Mr. Wong, in part because of a decrease in the number of government employees in the past 18 months. Depreciation of the value of homes under $133,000 is also a reason for the area's poor conforming-loan performance, he said.
Investors should not necessarily turn to nonconforming loans to solve their problems. Those originated in 1994 have a low teaser rate, according to Mr. Wong, because of the high percentage of ARMs included (51%). ARMs usually perform better during their first 18 months.
Observers are mixed on the outlook for 1995. "Broadly speaking, 1995 originations are similar to 1994," said Mr. Hayssen. "They have very similar performance statistics."
Recent declines in rates, he added, may pick up the level of single- family home loan refinancing, and consolidations in the mortgage arena may mean a little less competition.