For many investors, owner-occupancy is considered to be a leading indicator of loan and deal performance and an

important criterion for determining if loans are eligible for modification. But according to Equifax Capital Markets, owner-occupancy data reported at origination is typically out of date, and increased mortgage fraud among recent loan vintages has called this information into question.

“Mortgage security investors are demanding unprecedented visibility into borrowers’ constantly-changing credit behaviors so they can monitor risk and more accurately predict performance,” said Steve Albert, VP of Equifax Capital Markets. “For this reason, it is critical that investors have an up-to-date assessment of owner-occupancy in order to accurately predict defaults and loss severities for mortgage securities.”

To analyze this trend, Equifax used its own proprietary indicator to assess the up-to-date owner-occupancy of non-agency securitized mortgage loans. The company evaluated a sample of loan-level data on 2 million current non-agency securitized loans that were linked to up-to-date borrower credit data.

For current loans outstanding in November 2008, the 12-month default rate was 4.5 percent for loans identified as the borrower’s principal residence as origination, compared to 6.5 percent for investment properties.

While owner-occupancy data reported at origination is clearly a good predictor of loan performance, the more important question is: How accurate is this information for seasoned loans?

According to Equifax, 18 percent of loans reported as owner-occupied at origination no longer appeared to be in November 2008 and subsequently defaulted at a rate of 7 percent. Further analysis indicated that 66 percent of the loans continued to be owner-occupied, and those loans defaulted at a rate of only 3.7 percent. The remaining 16 percent of loans, where up-to-date owner-occupancy was unclear, had a default rate of 5.3 percent.

A closer look revealed that 11 percent of the loans appeared to never have been owner-occupied, and 7 percent of the loans appeared to have been owner-occupied for some time but no longer were. Equifax found that the loans that were owner-occupied for at least a period of time defaulted at a slightly lower rate that those that had never been owner-occupied.

Equifax said some of these loans were misreported as owner-occupied at origination, and in other instances, owners became landlords. For example, a borrower may purchase a residence, live in it for a few years, then subsequently buy a new home and rent out the former residence. And in other cases, borrowers may purchase a second home — making it appear that their residence is not currently owner-occupied.

Regardless of the reason, Equifax said up-to-date borrower information is crucial for investors to accurately predict default and determine which loans are modifiable.