Rising unemployment is pushing up delinquencies in US subprime mortgages at an “alarming” rate, according to CreditSights.
“The latest numbers from our Subprime RMBS sample show a huge jump in delinquencies 
in the past two months, ” CreditSights says in a new report: Subprime Pool Performance Update: Delinquencies Rocket as Unemployment Rises. “All three of the vintages that we track posted their largest one month increases in October and the largest three month increases since March. As the chart shows, delinquencies as a percentage of the remaining balance in 2005 subprime RMBS had even started to fall despite the remaining balances continuing to shrink.”
“It is possible that delinquent borrowers are making payments to keep their mortgages at the same degree of delinquency while they wait for mortgage investors to jump on board HOPE for Homeowners.”
“However, we believe the rise is driven firstly by delinquency growth returning to trend after a tax-rebate slowdown and secondly by rising unemployment and rate resets creating disposable income shocks for borrowers.”
CreditSights has suggested that the slowdown in delinquencies in the second and third quarters might have been the result of the second quarter tax rebates.
Unfortunately the benefits from the rebates have proved short-lived and the scale of the recent deterioration is alarming.
Technorati Tags: credit-crisis, mortgage-backed-securities, RMBS, structured-finance, subprime
U.S. subprime residential mortgage-backed securities, or RMBS, originally rated “AAA” and issued from mid-2005 through mid-2007, will see much smaller write-downs than the $180 billion projected for the underlying mortgages, said Standard & Poor’s RatingsXpress Credit Research.
As a result, while RMBS investors will see significant losses — an estimated $85 billion – that is far less than the losses generated by the underlying collateral, S&P said, mainly due to they way RMBS are structured.
We expect realized collateral losses in U.S. subprime RMBS transactions to accelerate as the current residential inventory is liquidated. As a result of significant collateral losses, we project that many subprime RMBS certificates will be written down. Depending on where a class is in a transaction’s capital structure, it may be written down by as little as 1% or by as much as 100%.
In S&P’s analysis, the ratings agency forecasts that subprime mortgage delinquencies will continue to climb and that by the end of 2009, home prices will have fallen nearly 30 percent from the July 2006 peak.
Home prices are down about 20 percent over the past two years, according to the S & P Case-Shiller Home Price Index, with declines accelerating over the summer.
For details, see “U.S. Subprime RMBS Losses For Original ‘AAA’ Bonds May Be Significantly Less Than Market Projections.”
Technorati Tags: collateral, credit-crisis, delinquencies, home prices, housing crisis, mortgage delinquencies, residential mortgage-backed securities, RMBS, S&P Case-Shiller Home Price Index, subprime, subprime lending, subprime-mortgage, write-downs
As in the previous quarter, the global credit crisis dominated Research Recap’s Top Ten Posts of the third quarter, with only one post not related in some way to the market meltdown. Many of the posts turned out to be prescient, led by Fitch Ratings’ July warning that US Mortgage Insurers’ Troubles May Worsen. This prediction was borne out this month when Moody’s put several of the insurers on watch for possible downgrade.
In the runner-up spot was NERA Economic Consulting’s July report Subprime-Related Litigation on the Rise, which was buttressed by a Stanford Law School analysis showing that subprime lawsuits were running at double last year’s pace.
The bronze medal goes to the lone non-financial post, Ernst & Young’s July report US Oil Production Flat Over Past 4 Years, published near the peak of the recent oil price spike.
The fourth place post based on the International Monetary Fund’s December 2007 report examining the Role of Hedge Funds in Subprime Crisis Examined is approaching Hall-of-Fame status, consistently featuring among our top posts nine months after it was first published. The IMF also featured in the fifth place post in which Oxford Analytica drew on IMF and OECD data in September to conclude that Speculation Does Not Explain Apparent Housing Overvaluation.
The sixth place post based on a June Moody’s report, Global Junk Bond Default Rate Doubled in First Five Months, now seems modest. Standard & Poors now expects the speculative default rate to triple in the next 12 months. Standard & Poor’s served up the seventh most popular post, in which the ratings agency accurately assessed that Lehman Failure’s Impact on European Banks would be significant.
In what now seems like understatement, the eighth place post based on a June report from Audit Integrity was also right on the money: Credit Default Swaps Adding Rather Than Mitigating Risk? Moody’s July Guide To Interpreting Mark-to-Market Losses of Monolines took the ninth spot.
In what may now seem like wishful thinking, rounding out the top ten on a more optimistic note was KPMG’s July report Greentech Expected to Lead Resurgence of IPOs in 2010.
Technorati Tags: (LEH), CDS, credit-default-swaps, european-banks, green-tech, Hedge-Funds, housing, IPO, junk-bonds, Lehman, litigation, monoline-insurers, oil-exploration, oil-refining, private-mortgage-insurers, structured-finance, subprime, Zeitgeist
What a difference six months makes. The Bank of England’s latest semi-annual Financial Stability Report might be better titled Financial Instability Report. In May Research Recap highlighted the Bank’s concern that subprime-related losses by financial institutions may be overstated. Seeing signs of an improvement in credit market sentiment, the Bank wrote then that “As uncertainty falls and market liquidity improves, it should become clearer that some assets appear cheap relative to credit fundamentals, which should in turn encourage a recovery in confidence and risk appetite by speculative and long-term investors… In that environment, firms may find that previous mark-to-market loss estimates have been overstated and some writebacks of reported losses may occur.”
Now, the Bank’s October report graphically illustrates the seismic changes that have taken place in the financial sector. One startling graphic shows the funding gap of UK banks:
Another illustrates the woes of hedge funds:
The report also summarizes and analyzes rescue efforts to date:
Taken together, perhaps as much as £5 trillion has implicitly or explicitly been made available by central banks and governments since April 2008 to support wholesale funding.
“While temporarily helping lengthen funding maturities, this cannot be a source of funding for banks in the medium term. It will need to be replaced from private sector sources. Given the scale of this intervention, reducing reliance on the official sector as a source of funds is likely to be a significant constraint on banks’ activities over the medium term.”
Looking further ahead, the Bank says “the events of the past year or so clearly highlight the need for a fundamental overhaul of the regulatory safeguards used to mitigate systemic risk within the financial system.”
The report also compares mark-to-market and credit losses, and analyses counterparty credit risks in OTC derivatives markets.
Technorati Tags: Bank-of-England, banking-system, credit-crisis, derivatives, Hedge-Funds, subprime
Fitch Ratings warns that UK non-conforming residential mortgage-backed securities face increasing downside risk due to current declining performance trends and downward pressure on house prices.
According to Halifax, Britain’s biggest mortgage lender, house prices lost 13.2% of value for the year ended 30 September 2008, the biggest ever recorded loss for a one-year period.
“We are increasingly concerned over UK non-conforming RMBS performance, where 90-day delinquencies and current losses, in some cases, are exceeding 20%,” says Rodney Pelletier, Managing Director in Fitch’s Structured Finance team. However, the agency adds that although downgrades on UK non-conforming RMBS are possible, they are most probable in the lower- rated tranches and uncollateralised excess spread notes, while the highest rated ‘AAA’ notes are less exposed. The agency adds that the severity of any rating action will depend on several factors including vintage, original loan-to-value, prepayment history, excess spread availability, delinquency ratios, hedging and expected losses.
While conventional thought supports that recent vintages are most at risk, Fitch warns that potential negative action on older transactions cannot be ruled out.
“Generally speaking, older transactions with significant prepayments can be less affected, but they are not immune to potential downgrades on the lower-rated tranches, especially if significant negative selection has occurred and losses increase significantly,” adds Mr Pelletier.
Fitch is currently undertaking a supplementary study to set out its expected case of house price movements and mortgage defaults. UK non-conforming RMBS tranches potentially exposed under this expected case will be put ‘under special review’ for possible rating action. This study will supplement its initial report entitled “Ratings Stress Test: Impact of UK Housing Market Downturn Scenarios on UK Non-Conforming RMBS Ratings“, completed in March 2008.
Technorati Tags: housing, RMBS, structured-finance, subprime, UK
Moody’s Investors Service today placed several private mortgage insurers on review for downgrade, reflecting continuing deterioration in the housing market.
Moody’s said the rating actions primarily reflect the rating agency’s expectation of further stress on the companies’ risk-adjusted capital position in light of continued deterioration in housing fundamentals, as reflected in the upward revisions to Moody’s loss expectations for certain residential mortgage-backed securities announced in September.
Moody’s said it is placing on review for possible downgrade the A2 insurance financial strength (IFS) ratings of Radian Group’s (NYSE: RDN) primary mortgage insurance subsidiaries, the Baa1 IFS rating of Radian Insurance, Inc. and the A3 ratings of financial guaranty insurance subsidiaries in the Radian Asset group. Moody’s has also placed the Ba1 senior debt rating of the holding company under review for possible downgrade.
Moody’s also announced that it is placing on review for possible downgrade the A3 insurance financial strength rating of the PMI Group’s (NYSE: PMI) US and European mortgage insurance operations. Moody’s has also placed the Baa3 senior unsecured debt and Ba1 junior subordinated debt ratings of the holding company, PMI Group, under review for possible downgrade. The Aa3 insurance financial strength rating of PMI Mortgage Insurance Ltd, the Australian mortgage insurer, remains under review for further downgrade pending the closing of the announced acquisition of PMI Australia and PMI Asia by QBE Insurance Group Ltd.
Moody’s is reviewing for possible downgrade the the A1 ratings of Mortgage Guaranty Insurance Company (MGIC) and MGIC Indemnity Corporation, and the A2 insurance financial strength rating of MGIC Australia Pty Limited. Moody’s also placed the Baa1 senior debt ratings of the holding company, MGIC Investment Corp, under review for possible downgrade.
Moody’s also is reviewing for possible downgrade the the A1 ratings Republic Mortgage Insurance.
Technorati Tags: MGIC, PMI, private-mortgage-insurers, Radian, Republic Mortgage Insurance, subprime
A google search for “subprime” carried out 10 years ago would have yielded 14,500 results. Today that same search offers up 14.5 million results. A search for “credit default swaps” in October 1998 yielded 33,900 results, compared with over 1 million today, while results for “hedge funds” ballooned from 162,000 to over 8.5 million. By contrast, a search for “conventional mortgage” has risen only from 111,000 to 579,000.
Even allowing for extraneous factors, these are startling numbers. They help explain the continuing popularity of a Research Recap post from last December that combines “hedge funds” and “subprime.” Of course, interest in the massive liquidations by hedge funds no doubt played a part in making Role of Hedge Funds in Subprime Crisis Examined the top post of the week. Still, it just goes to show that good research has a long shelf life. So it’s worth taking a look back at that article by the International Monetary Fund’s Randall Dodd.
The article examines the role of hedge funds in the unfolding crisis, noting that Fitch Ratings warned of the risks in 2005.
“Hedge funds have quickly become important sources of capital to the credit market,” but “there are legitimate concerns that these funds may end up inadvertently exacerbating risks.”
That is because hedge funds, which invest in largely high-risk ventures, are not transparent entities—their assets, liabilities, and trading activities are not disclosed publicly—and they are sometimes highly leveraged, using derivatives or borrowing large amounts to invest, Dodd wrote. So other investors and regulators knew little of hedge funds’ activities, while, as Fitch Ratings put it, because of their leverage, their “impact in the global credit markets is greater than their assets under management would indicate.”
Among the potential remedies suggested by Dodd in December 2007: “applying industry standards and any existing regulations pertaining to the use of collateral (margin) to OTC derivatives and hedge fund borrowing.”
Likewise, the current meltdown had recent visitors looking back to our January 2008 Research Primer on Credit Default Swaps, based on a Fitch Ratings report.
More recently, our Ratings Roundups of recent ratings actions affecting financial institutions in the news continue to be popular, as is the Standard & Poor’s report detailing the sharp rise in delinquencies among not-quite-prime “Alt-A” mortgages.
Research Recap Headline of the Week:
Bonuses May Fall in London (The Wall Street Journal)
Technorati Tags: Alt-A, CDS, credit-crisis, credit-default-swaps, credit-ratings, Hedge-Funds, RMBS, structured-finance, subprime, Zeitgeist
Only time will tell whether Friday October 3 marked a turning point in the credit crisis. Final passage of the bank rescue bill, however flawed it may be, provides some hope that confidence can begin to be restored soon. But perhaps more significant is the spectacle of Wells Fargo (NYSE: WFC)and Citigroup (NYSE: C) fighting over Wachovia (NYSE: WB) If they both want such an impaired asset, maybe it’s a sign of light.
Still, our most popular post of the week, Recent Vintage Alt-A US RMBS Delinquencies up Sharply, suggests there is much more pain to come. Based on a report from Standard & Poor’s, this post pointed out that supposedly -almost-prime” Alt-A loans are going bad at a faster pace even than subprime loans. Also discouraging was Fitch Ratings US Prime Auto Loan ABS Losses Reach Record High, though the post did note that these securities are holding up relatively well.
Our summaries of ratings actions on financial institutions in the news continued to be well read, led by Ratings Roundup: B&B, Fortis, Citi/Wachovia, Dexia, Hypo.
It’s also nice to see a strong response to an audio post, based on the excellent work of Alex Blumberg and Adam Davidson featured on NPR. Their latest report explaining How the Commercial Paper Market Seized Up helped make it clear why the bailout plan was needed.
Finally, for a slight change of pace,the CreditSights report No Systemic Risk to Utilities Despite Constellation Merger was also well read.
Research Recap Quote of The Week:
After 24 months of seasoning, total delinquencies for 2006 represent approximately 18.54% of the current aggregate pool balance, a 208% increase over the 2005 vintage, which had 6.03% in total delinquencies after the same amount of seasoning. -Standard & Poor’s, commenting on mortgage securities backed by Alt-A loans.
Technorati Tags: (c), (WB), (WFC), ABS, Alt-A, auto-loans, Citigroup, credit-crisis, structured-finance, subprime, utilities, Wachovia-Corporation, Wells-Fargo-&-Company, Zeitgeist
Policy responses to the current credit crisis will be undertaken at national and European Union level and will not spawn any “supranational regulatory framework,” Oxford Analytica says in a new report. At the same time, private firms, and private and public sector cooperative bodies, will promote private solutions, and new norms, standards, and best practices, for managing and confronting risk.
Long-awaited proposals were released yesterday to overhaul the EU regulatory and supervision framework for banks conducting business across national borders and to strengthen capital requirements.
If approved by the EU Parliament, the measures would take effect in 2010. A comprehensive rethink of global financial regulation is unfolding in response to the credit crisis, which is enhancing the relative importance of EU and EU member state regulators. The revised framework — which will take several years to realise — will rely on improving internal EU regulation, and promoting global regulatory norms, rather than creating new supranational regulatory institutions.
French President Nicolas Sarkozy has called for a crisis summit to be held on October 4 to include all European G7 members (the United Kingdom, France, Germany, and Italy), the president of the European Central Bank, chairman of the euro-area group, and European Commission representatives.
However, no major regulatory institutional innovations could be expected at G7 level — such as an effort to create any supranational banking or capital markets regulator (despite the enthusiasm of some political figures, such as UK Prime Minister Gordon Brown, for regulatory innovations).
Instead, continued incremental regulatory improvements can be expected in public and private arenas. Some of these bring to fruition efforts initiated at earlier phases of the credit crisis. European regulators, firms, and individuals are playing leading roles in many of these discussions.
Market players are not waiting on regulatory innovations to force changes in their behaviours. Instead, they are currently engaged in major internal discussions over policies to understand, manage, shift, and allocate risk. Risk management is moving away from an undue emphasis on observable prices — this is reflected indirectly in latest SEC fair value guidance — to a more granular understanding of risk, under which risk managers have to understand underlying assumptions upon which a product is expected to operate.
In a related report, OxAn says Congress and the next US president will certainly seek to design a much tighter system of financial services regulation. It is likely to feature firm rules and systematic boundaries encompassing entire industries, rather than identifying and prosecuting potentially culpable individuals.
Much of the OTC derivatives market will migrate to regulated exchanges, and capital-adequacy ratios for a more tightly regulated banking sector will be raised.
Technorati Tags: banking-system, derivatives, European-Commission, Federal-Reserve, financial-regulation, financial-system, subprime
Annualized net losses on U.S. prime auto loan asset-backed securities (ABS) reached a record high in August, but negative rating actions in 2008 have been minimal, according to Fitch Ratings.
Even with these elevated levels of losses, structural features and credit enhancement along with transactions deleveraging, have limited negative ratings actions in 2008, Fitch said. Fitch has upgraded 29 prime auto ABS subordinate tranches in 2008, down from 66 in 2007. During August, Fitch upgraded 11 tranches from four prime transactions including upgrades on transactions of U.S. domestic captives.
Additionally, Fitch continues to issue upgrades on subordinate notes, albeit at a slower rate than in 2007.
In the historically weak fall months, Fitch expects losses may approach the 2% level as predicted at the beginning of the year.
U.S. prime auto loan asset-backed securities (ABS) hit a record high of 1.73% in August, just above the previous high set in early 2003. Auto ABS performance in 2008 continues to be impacted by the poor state of the U.S. economy including rising unemployment, deteriorating consumer health, and lower wholesale vehicle values. The 2007 vintage is producing the highest levels of losses when compared to vintages going back to 2000.
In the prime sector, Fitch’s 60+ days delinquency index was unchanged at 0.71% in August over July, 20% above 2007 levels. Losses rose 22% in August over July driving losses 101% higher when compared to August 2007.
The subprime auto ABS 60 days-or-more delinquency index was at 3.85% in August, 6% higher than July. Losses were at 7.45% in August, 14% over July, and on a year-over-year basis 31% higher than in August 2007. The weakest period of performance for subprime losses was in late 2003 when losses were approximately 9.50%-10%, so current levels remain below this range.
Technorati Tags: asset-backed-securities, auto-loans, credit-markets, structured-finance, subprime