Payments Shocks Boost Alt-A, Subprime RMBS Delinquencies
CreditSights says accelerating shift from interest-only to higher amortising payments will spur delinquencies.
Excerpts from US RMBS Update: A Payment-Shock Seesaw
Delinquencies of 2005-vintage subprime and Alt-A loans will likely continue to be boosted because of mortgage-related payment shocks, CreditSights says in its latest update on the US RMBS market:
“The past year has seen only 7% of subprime loans and 2% of Alt-A mortgages shifting from interest-only payments to amortising. In contrast, over the next 15 months, more than one third of interest-only subprime loans and one fifth of interest-only Alt-A loans are due to begin repaying principal. Until the middle of 2010, those interest-only expiries will be mostly 2005-vintage loans. Indeed, 60% of 2005-subprime and 20% of Alt-A interest-only loans will reset between now and the end of 2010. To put this in conext, roughly a third of 2005-originated subprime loans and more than a half of 2005 Alt-A loans were initially interest-only.”
That means that as many as 20% of subprime and 10% of Alt-A loans originated in 2005 could face payment hikes over the next 15 months.
“What’s more, interest-only loans are likely to represent an even greater percentage of the remaining principal balance outstanding for two reasons. First, interest-only loans will not have been paying off principal since being originated. And second, an interest-only loan may have been less likely to have already defaulted than an equivalent principal-repayment mortgage due to lower mortgage payments so far. Granted the default rate may have been balanced out by interest-only borrowers being the most likely to be overleveraged.”
The CreditSights report also include analysis of the impact of loan modification initiatives.
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