Mortgage Delinquencies Running Ahead of Rate Reset Pace
CreditSights wonders why mortgage delinquency rates are running higher then they should be based on the pace of mortgage-rate resets.
In the case of the 2007 vintage, very few loans have as yet moved from interest-only to amortising, CreditSights notes in a new report. “And yet, the proportion of loans that are seriously delinquent is already higher in the 2007 securitisations than for the 2005 or 2006 deals.”
This once again begs the question why, if there has been so little payment shock, are these loans performing so poorly.
Mortgage default has historically been associated with cash flow problems either due to a rise in the cost of mortgages or a fall in income. However, at first glance, the payment altering features on subprime and Alt-A mortgages appear insufficient to be able to explain defaults for the loans in the more recent RMBS.
CreditSights says the Alt-A mortgage market is already the next shoe dropping in the US housing crash. “The cause, we believe, is the overborrowing inherent in Alt-A and later vintage subprime lending, combined with the assumptions of either rising house prices or rising salaries that made such borrowers very payment sensitive from the outset.”
“It is possible that these later vintage borrowers were barely able to afford their mortgage payments from the outset, but that rising house prices made sacrifices worthwhile. However, with house prices in many areas of the US having fallen over the past two years, there may be little incentive to continue to make those sacrifices. In this case, falling house prices may unusually be a sufficient catalyst for default.”
Subprime Resets and Interest-Only Periods - Are the Payment Shocks Insufficient to Explain the Defaults? is available for purchase.
Meanwhle, Fitch Ratings expects many borrowers of U.S. option adjustable rate mortgages (ARMs) to soon have a substantially more difficult time making their increased monthly mortgage payments. In a special report Fitch says this is because many mortgages underlying recent vintages will start reaching their maximum allowable debt limits and will reset to a higher payment (recast) earlier than expected.
“Fitch expects roughly $29 billion to recast to higher monthly payments by the end of 2009 and an additional $67 billion to recast in 2010. Of this, approximately $53 billion is attributed to early recasts. At recast, the mortgage payment is increased to ensure full amortization of the loan by maturity. Though recent declines in the 12-month Treasury average (MTA) rates have mitigated some risks, the majority of option ARM borrowers have elected to make the monthly minimum payment over the past 24 months.”
As a result, a large number of these loans, especially those with 40-year amortization and 110% principal caps are expected to reach their recasts before the end of the five-year mark.
This will likely cause levels of 90-day plus delinquencies, currently ranging from 10% to 24%, to more than double after recast for 2004-2007 vintage loans.
Option ARMs: It’s Later Than It Seems is available for purchase.
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