Fitch Downgrades More 2005-2008 Subprime RMBS
Continued weakness in the housing and employment picture has led Fitch Ratings to make further downgrades on many 2005-2008 vintage subprime mortgage-backed securities.
Fitch said its actions followed an updated analysis of expected default and loss from the collateral pool in addition to cash flow analysis of each class. “The average updated expected collateral losses as a percentage of the original pool balance for the 2005, 2006 and 2007 vintages are 17%, 39% and 47%, respectively. As a percentage of the remaining pool balances, the average expected losses for the three vintages are 45%, 59% and 55%.”
Fitch Rating’s revised peak-to-trough expectation is for prices to decline by 36% from the peak price achieved in mid-2006. The additional 9% decline represents a 12.5% decline from today’s levels.
“The home price declines to date have resulted in negative equity for approximately 50% of the remaining performing borrowers in the 2005-2007 vintages, ” Fitch says. “In addition to continued home price deterioration, unemployment has risen significantly since the third quarter of last year, particularly in California where the unemployment rate has jumped from 7.8% to 11%.”
“The combination of continued home price and employment decline has kept negative pressure on the roll-rates of performing borrowers into a delinquency status. Although net roll-rates have moderated from the seasonal high in January, the most recent month’s performing-to-delinquent net roll-rate of 3.17% remained modestly higher than that exhibited in the third quarter of 2008 when modified loans are excluded.”
“Modifications have increased notably and Fitch estimates 23% of the 2005-2007 vintage borrowers reported as ‘Current’ have had their loan terms modified. In recent months, on average approximately 2%-3% of the outstanding mortgage pool has been modified each month. However, the performance to date of modified loans continues to raise concerns about the sustainability of the modifications due possibly to an insufficient emphasis on the borrower’s overall financial debt burden and the borrower’s willingness to stay with the property due to their current equity position.”
As Fitch describes in U.S. RMBS Servicers’ Loss Mitigation and Modification Efforts published on May 26, 2009, re-default rates on modified loans are trending above 50% within 12 months of the modification and re-default rates after 12 months of 65%-75% appear likely.
The market and performance trends reflected in the updated loss projections have resulted in further rating downgrades for the remaining classes outstanding in the 2005-2008 vintages.
For details of the affected transactions see: Fitch Takes Various Actions on 2005 – 2008 Vintage Subprime RMBS.
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