Loss severities on distressed U.S. residential mortgage loans are likely to rise this year as several key government support programs expire, according to Fitch Ratings.
Low mortgage rates, homebuyer tax credits and government directed loan-modification programs have led to an improvement in home prices and loss severities since second quarter-2009. But the expiration in the coming months of both the homebuyer tax credit and the Federal Reserve’s $1.25 trillion MBS purchase program will increase negative pressure on home prices and loss severities, according to Senior Director Grant Bailey.
Additionally, an increase in the liquidation of loans with unsuccessful loan modifications is expected to add to the supply of distressed inventory in the housing market. ‘Servicers are further along in identifying borrowers ineligible for modifications and will likely be more aggressive in liquidating those loans this year compared to last,’ said Bailey. ‘Less costly alternatives to foreclosure, such as short-sales, should help stem rising loss severities due to the lower costs and speed of the resolution.’
Loss severities on loans resolved through short-sales are approximately 10% lower than loss severities on loans in which the servicer takes possession of the property. Additionally, the seasonal increase in housing activity through the summer may delay the full impact of the withdrawal of the government support programs until later this year.
In the two years prior to the recent improvement, national home prices dropped approximately 30% while loss severities on loans which incurred losses doubled to record highs of 43% for private-label Prime loans, 58% for Alt-A loans and 72% for Subprime loans.
For details, see RMBS Performance Metrics (Premium)
Technorati Tags: delinquencies, housing, residential mortgage-backed securities, RMBS, structured-finance
Moody’s takes a look at the residential mortgage market in Spain in a new report. While it too early to accurately determine final recovery rates, the initial findings are worrisome.
Selected excerpts:
There is some uncertainty in Spain regarding how recoveries of non-performing mortgage loans are going to unfold as the adverse economic cycle progresses. This is exacerbated by the
lack of visibility of the market price of properties during the current recession and of the level and time at which prices will settle after the recession.
To better understand the drivers of loss severity and trends, Moody’s has obtained loan-by-loan recovery data from 59 Spanish Residential Mortgage-Backed Securities (RMBS) deals amounting to 26,626 cases of loans entering arrears 90 day between 1997 and August 2009.
Arrears 90 day severity has increased rapidly since 2006 from an historical low average of 5.8% severity with around nine months recovery lag during the benign cycle (1997 to 2005). For loans that entered arrears 90 day in Q1 2008 (the latest date analysed to give a minimum of 1.5 years of observation period for recoveries), the current average severity is 46.2% with a nine month recovery lag.
However, once the ongoing recovery processes are complete, the final severity could improve to a level around 11% with the recovery lag increasing to 21 months, based on a simplified assumption on future recoveries with 30% house price decline peak-to-through from Q1 2008 to Q3 2011 and net from interest accrued and foreclosure costs. The average severity and recovery lag for loans that do not cure or refinance will be higher than the levels shown above and are a better indication of severity on foreclosure. Based on the same assumption for future recoveries as above, the severity for non-cured and non-refinanced loans that entered arrears 90 day in Q1 2008 was calculated at 17.7% with an average recovery lag of 31 months.
We expect final recoveries for loans that entered arrears in 2008 and 2009 to show even more stressed results. At present, the observation period is too short to draw any conclusions on these vintages.
For details see: Recovery Trends In Spanish RMBS (Premium)
Technorati Tags: mortgage-backed-securities, RMBS, Spain, structured-finance
Moody’s has issued details of its methodology for its recent increase in loss projections for US subprime and Alt-A residential mortgage backed securities (RMBS) issued between 2005 and 2007.
Moody’s last month revised lifetime loss projections for US subprime RMBS issued between 2005 and 2007. On average, Moody’s now project cumulative losses of 19% of the original balance for 2005 securitizations, 38% for 2006 securitizations, and 48% for 2007 securitizations. For Alt-A Moody’s projects cumulative losses of 14% for 2005 securitizations, 29% for 2006 securitizations and 35% for 2007 securitizations.
A few tidbits from the reports:
As a result of dropping house-prices, over 56% of subprime loans and over 58% of Alt-A loans in Moody’s rated securities are currently under-water.
- After increasing starkly in 2008 (from the mid-40s to the mid-60s), loss severities on subprime pools stabilized in 2009. As of December 31, 2009, severities across all vintages were approximately 70%. We expect severities on subprime pools to rise slightly as we reach the home price trough, but improve thereafter. As a result, we expect lifetime severities to average around 70%.
- After increasing through the first half of 2009, loss severities on Alt-A pools have since stabilized. As of December 31, 2009, the three month averages for 2005, 2006, and 2007 severities were approximately 53%, 59%, and 59%, respectively, an increase, in absolute terms, of 8-13% from a year ago. We expect severities on Alt-A pools to remain largely stable at the higher levels.
- Recent government efforts to curb defaults and foreclosures through loan modification have thus far failed to gain the previously expected traction. The updated loss estimates incorporate approximately 5% for subrime and 2% for Alt-A relative benefit to projected losses across vintages to reflect the limited anticipated success of the program.
For details, see Subprime RMBS Loss Projection Update: February 2010 and Alt-A RMBS Loss Projection Update: February 2010 (Premium)
Technorati Tags: Alt-A, housing, mortgage defaults, mortgage modification, residential mortgage-backed securities, RMBS, structured-finance, subprime
Oxford Analytica provides a review of the history of Fannie Mae and Freddie Mac and looks at the options for their future in this complimentary download from the Alacra Store.
Selected excerpts:
Despite widespread expectations to the contrary, President Barack Obama’s recently presented budget proposal for fiscal year 2011 provided no indication of what the government plans to do with Fannie Mae and Freddie Mac once they eventually emerge from ‘conservatorship’ (a period of direct government support). The implication is that the two will remain instruments of government policy, regardless of the cost to the Treasury.
Since the establishment of the conservatorship, Fannie Mae realised losses of 111 billion dollars and Freddie losses of 63 billion dollars. These losses have exhausted the value of each company’s shareholder equity and have resulted in considerable draws from the US Treasury under the SPSAs. To date, Fannie has drawn 60 billion dollars and Freddie has drawn 50 billion. On December 24, 2009, the administration announced that it would allow Fannie and Freddie to have unlimited losses until end-2012. It also announced that it was scrapping plans for these two agencies to reduce the size of their portfolios.
As long as they continue to make major losses, Fannie and Freddie are unlikely to emerge from government conservatorship. Instead, the administration will continue using these enterprises to support its efforts to stabilise the housing market, until there has been sufficient healing in private sector financial institutions — perhaps in 2011.
The full report has been made available free of charge to ResearchRecap users for 30 days by special arrangement with Oxford Analytica, an Alacra content partner. After 30 days, the report will revert to its regular AlacraStore price of $150.
For additional free research reports from the Alacra Store click here
Technorati Tags: complimentary research, Fannie-Mae, Freddie-Mac, GSE, housing, Oxford-Analytica, residential mortgage-backed securities, RMBS, structured-finance
Investors’ default rate forecasts for collateral in nearly all classes and vintages of U.S. residential mortgage-backed securities have risen dramatically in Standard & Poor’s Fixed Income Risk Management Services’ latest quarterly survey, while predictions for European mortgage default rates have fallen across all classes and vintages with the exception of Spain.
Twelve-month default rate expectations on certain U.S. RMBS collateral have doubled since the previous quarterly survey, with U.S. 2007 Alt-A pay option ARM RMBS collateral default rate predictions rising to 25% from 12% polled in Q3.
For the same vintage, U.S. prime fixed-rate collateral default forecasts rose to 5.75% from 4.00%; U.S. prime adjustable-rate collateral default forecasts moved up to 10.50% from 6.25%; and U.S. subprime collateral default forecasts increased to 34.36% from 23.00%.
By contrast, 12-month forecasts for U.K. nonconforming loan RMBS collateral default rates across an average of vintages fell to 4.61% from 9.00% polled in Q3; for prime U.K. mortgage default rates, the 12-month average forecast for all vintages fell to just 1.09% from 2.00%; forecasts for Italian and Dutch mortgage default rates dropped to 1.21% and 1.32%, respectively, while Spanish mortgage default expectations were stable at 2.80%.
For details, see FIRMS Survey Says Investors Expect European RMBS Mortgage Performance To Improve But U.S. Collateral To Deteriorate (Premium)
Technorati Tags: Alt-A, Italy, mortgage defaults, mortgage-backed-securities, Netherlands, RMBS, Spain, structured-finance, subprime-mortgage, UK
U.S. prime jumbo loan performance continued to weaken in January as serious delinquencies rose for the 32nd consecutive month, according to Fitch Ratings.
Although prime jumbo loan delinquencies began to rise in the second quarter of 2007, they accelerated in 2009 nearly tripling over the course of the year. Florida saw the biggest monthly jump of the five states with the highest volume of jumbo loans outstanding.
The new year has brought no relief from declining jumbo loan performance. The trend line for delinquencies indicates the 10% level could be reached as early as next month. – Managing Director Vincent Barberio
Overall, prime jumbo RMBS 60+ days delinquencies rose to 9.6% for January (up from 9.2% for December 2009). While delinquency rates on earlier vintages (pre-2005) remain well below that of recent vintages, more seasoned pools have experienced significant deterioration over the past year with 60+ days delinquencies increasing from 1.8% to 4.3%. While less than 5% of prime jumbo senior RMBS classes issued prior to 2005 have been downgraded to date, approximately 40% currently have a Negative Rating Outlook as a result of the weakening collateral performance.
For details, see Fitch’s RMBS Performance Metrics (Premium)
Technorati Tags: jumbo mortgages, mortgage-backed-securities, RMBS, structured-finance
Standard & Poor’s today updated its loss projections for 2005-2007 vintage prime, subprime, and Alt-A residential mortgage-backed securities transactions, leading it to place 12,000 classes of securities (RMBS) issued in 2005-2007 on CreditWatch with negative implications.
In addition, 222 ratings remain on CreditWatch negative. The affected classes are from 1,809 transactions, have a total original par amount of approximately $962.96 billion, and have a current aggregate principal balance of roughly $537.90 billion.
Our revised loss projections for the prime transactions also reflect an increase in our loss severity assumption for prime collateral to 45%. In addition, the performance of residential collateral supporting the affected transactions continues to deteriorate, which has resulted in elevated defaults and losses for all three asset types.
S&P’s overall vintage and product-specific lifetime weighted average loss projections for 2005-2007 vintage prime, subprime, and Alt-A RMBS are now as follows:
For outstanding prime transactions,
- 2005 vintage losses have increased to approximately 4.00% from approximately 2.82%;
- 2006 vintage losses have increased to approximately 6.60% from approximately 5.08%; and
- 2007 vintage losses have increased to approximately 9.75% from approximately 6.97%.
For Alt-A transactions,
- 2005 vintage losses have increased to approximately 11.25% from approximately 10.00%;
- 2006 vintage losses have increased to approximately 26.25% from approximately 22.50%; and
- 2007 vintage losses have increased to approximately 31.25% from approximately 27.00%.
For subprime transactions,
- 2005 vintage losses have increased to approximately 15.40% from approximately 14.00%;
- 2006 vintage losses have increased to approximately 35.00% from approximately 32.00%; and
- 2007 vintage losses have increased to approximately 43.20% from approximately 40.00%.
The complete ratings list is available in 2005-2007 Vintage U.S. Prime, Subprime, And Alt-A RMBS Transactions Affected By Feb. 2, 2010, CreditWatch
Actions. (Premium)
Technorati Tags: Alt-A, jumbo mortgages, residential mortgage-backed securities, RMBS, structured-finance, subprime-mortgage
Losses on 2008 vintage to exceed 12% as future loss severity averages 50%.
Moody’s now expects cumulative lifetime loss projections for US prime jumbo residential mortgage backed securities (RMBS) of 3.8% for 2005 securitizations, 8.0% for 2006 securitizations, 10.9% for 2007 securitizations and 12.3% for 2008 securitizations.
“Since our previous loss projections published in March2, serious delinquencies (defined as loans that are 60 or more days delinquent, in foreclosure, or held for sale, i.e. real estate owned or REO) on prime jumbo pools for the 2005, 2006, 2007 and 2008 vintages have increased substantially to 3.3% from 2.2%, 6.2% from 3.8%, 7.9% from 4.8% and 8.0% from 4.6%, respectively. We expect delinquencies and losses on prime jumbo pools to continue to rise in 2010 as house prices continue to decline and unemployment levels continue to rise. In the previous loss projection update we expected these key macroeconomic variables to moderate by the end of 2009. ”
The rapidly deteriorating performance of prime jumbo pools combined with continued adverse macroeconomic conditions prompted this revision.
“The loss upon default (severity of loss) on jumbo loans has also been rising in the last year. As house prices continue to depreciate, future loss severities are expected to reach around 50% on average, putting further pressure on loss expectations.”
“Further, recent government efforts to curb loan defaults and foreclosures through loan modification have thus far failed to gain the previously expected traction3, prompting us to reduce the average modification benefit to projected prime jumbo losses across vintages from 15% predicted earlier to less than 5% going forward.”
For details, see Prime Jumbo RMBS Loss Projection Update: January 2010 (Premium)
Technorati Tags: jumbo mortgages, mortgage delinquencies, mortgage-backed-securities, prime mortgages, RMBS, structured-finance
CDOs, CMBS and Spanish consumer and RMBS transactions most at risk of downgrade.
Fitch Ratings says today that while the tentative global macro-economic recovery is positive for the European structured finance sector, unemployment is still rising in many European countries and therefore scope for deterioration in European structured finance asset performance remains.
“It is too early for Fitch to change its overall negative rating sentiment for European structured finance,” says Philip Walsh, Managing Director in the EMEA structured finance team at Fitch Ratings. “However, as we have seen so far in the recession, rating downgrades are likely to be focused on junior tranches. The main exceptions to this have been CMBS and Structured Credit where downgrades across the rating spectrum have been more common.”
The rating Outlook is Negative for all classes of CDO, reflecting the drag that macro-economic conditions are exerting on the various types of reference entities in CDO portfolios.
Fitch expects Spanish RMBS to remain under pressure over the next 12-24 months due to the ongoing correction in the housing market, tighter credit conditions and the sharp increase in unemployment. While these factors will continue to drive higher arrears and defaults across portfolios, the agency believes that RMBS transactions backed by recent vintage collateral (post-2005) and higher risk attributes remain the most vulnerable in the downturn.
The UK has suffered the most significant reduction in commercial real estate values out of the main European markets funded by CMBS. Investor sentiment towards UK commercial property has improved recently, however, due to comparatively attractive yields, especially relative to other asset classes. Prime yields have rebounded quite quickly causing a surge in property returns during the fourth quarter 2009, although it has been limited to prime assets. Refinance risk continues to loom on existing transactions across Europe, including the UK, and could cause further ratings declines on specific portfolios.
For details see EMEA Structured Finance Sector Outlook – January 2010. (Premium)
Technorati Tags: CMBS, Europe, mortgage-backed-securities, RMBS, Spain, structured-finance
Ratings agency now expecting significantly higher losses than previously projected as foreclosures take their toll.
Moody’s has revised its loss projections for US subprime residential mortgage backed securities (RMBS) issued between 2005 and 2007. On average, Moody’s is now projecting cumulative losses of 18.7% for 2005 securitizations, 38.4% for 2006, and 48.1% for 2007, as a percentage of the original balance. As a result of the revision, Moody’s has now placed 5,698 tranches of subprime RMBS with an original balance of $584 billion and outstanding balance of $319 billion, on review for possible downgrade.
Moody’s last revised its loss projections in March 2009, to 13%, 30%, and 36% of original balances on 2005, 2006 and 2007 vintages, respectively.
On October 29, 2009, Moody’s announced that it would update certain assumptions underlying loss projections for each of the major RMBS sectors. Since March 2009, when Moody’s last announced a revision to its subprime loss projections, serious delinquencies (loans that are 60 or more days delinquent, including loans in foreclosure and homes that are held for sale) in subprime pools from 2005, 2006, and 2007 have increased to 48% from 43%, 56% from 51%, and 55% from 47%, respectively (reported as a percentage of outstanding pool balance).
Even though the Case-Shiller index in recent months has reported very modest home price gains, Moody’s believes the overhang of impending foreclosures will impact home prices negatively in the coming months.
Moody’s Economy.com (MEDC) expects home prices to fall by an additional 11% to reach a peak-to-trough decline of approximately 37%. Adding to borrowers’ financial pressure, unemployment is now projected to peak at around 10.5%. Both measures are expected to reach their peaks sometime in the second half of 2010, after which recovery is expected to be slow.
Standard & Poor’s said last week that under an expected case scenario, “our recovery results for subprime securities show an average recovery of 60.5% of a security’s current balance and 66.0% of a security’s initial par value” for the 2005-2007 vintages of subprime mortgages released to date. This equates to a loss of 34% of principal on average for the three vintages..
For details see Moody’s updates loss projections for US Subprime RMBS issued in 2005-2007 (Premium)
Technorati Tags: mortgage delinquencies, residential mortgage-backed securities, RMBS, structured-finance, subprime-mortgage
