In a conference call held Thursday, Fitch Ratings said that the subprime crunch isn’t over — and is actually gaining speed, despite mass media wear-out on the subject. Glenn Costello, co-head of the U.S. RMBS group at Fitch, and Grant Bailey, director in RMBS surveillance, both said that home price declines are continuing to create significant problems in the mortgage market.
“Loan modifications have not significantly reduced foreclosure efforts to date,” Costello said.
Roll rates for 2007 vintage subprime first liens are significantly higher than in previous vintages; those roll rates are provided in the graph to the right. Roll rates capture the number of loans moving from current to delinquent each month — and the graph shows that 2007 vintage loans are rolling into default at a greater than 4 percent rate. Per month. Every month. Consistently. And that only includes originations through the third quarter of last year, to boot.
That’s huge, for anyone outside of the industry that hasn’t seen this sort of data before, especially given how new these loans are.
What’s worse, we’re not just looking at a subprime problem, as many HW readers already know. Below is a look at annualized default rates for Alt-A mortgages.
What should stand out to you is that the Q307 vintage was already above a 10 percent annualized monthly default rate by the end of December. Astounding. The culprit, of course, was an acceleration in housing price declines that put many borrowers upside down — and, given the incidence of fraud in most recent Alt-A vintages, a whole bunch of borrowers suddenly found themselves unable to refinance their way into another loan as lenders finally began to tighten their underwriting standards.
Fitch released a report in November of last year detailing the high incidence of borrower fraud in recent originations, particularly in Alt-A.
I’ve written before that until home prices stabilize, we’re going to be looking at a free fall in the large parts of the RMBS market; this sort of data helps tell the story of why this will be the case.
The full Fitch presentation — sans some slides used in the call and presented above — is available here. For more information, visit http://www.fitchratings.com.
One marginally positive aspect that you don’t mention is that there is a heck of a lot less subprime and Alt-A being written in absolute terms recently.
Defaults as % of average balances make be getting very high very quickly - but the loan base against which the % is applied is much much much lower than it was in 2005 and 2006.
Cas - no offense, but I didn’t mention it because it’s not an issue.
The denominator in the Default/UPB equation for a given vintage doesn’t change due to subsequent originations (it can shrink for other reasons, prepayments, credit risk). In other words, loans originated in the third quarter of 2007 establish a UPB base against which defaults are measured across time. That UPB base won’t shrink just because fewer loans are made one quarter later.
This means underwriting guidelines will continue to further constrict in order to keep pace with declining home values.
Who wants to buy a pool of RMBS that contain 95-100% LTV conforming anything with falling property values?
Anyone? Any takers? Going once, going twice…Sold to Fanniemae.
Jillayne - exactly.
When will we see Fitch downgrade the remainder of these securities to what would seem more appropriate levels given this default data?
The end of this crisis will coincide with a return to market fundamentals - by that I mean rental yield and supply and demand equilibrium.
What rental yield did the top of the market represent? Is US housing in oversupply? Where are foreclosed owners now living?? Are rents static, rising or falling?
The answers to these questions, i feel, will go a long way to showing where the bottom of the US housing market really is.
The RMBS loss numbers that financial institutions have announced are a joke. Wall Street demanded “Ok, what are your losses, we gotta know!”
Reply, “Er, 10 billion?. Yeah 10 Billion.”
They have know idea what actually makes up these RMBS. RMBS were priced on LTV, FICO score, and rate of return. Undwriting practices and collateral review (appraisals) are not easily understood by investors. They figured they couldnt lose because home prices were headed up.
The truth is, the financial institutions have no idea what they have on their hands. I estimated 400-600 billion three months ago. As of now, we have about 430 billion. Here is how get that:
The Feds 30 billion “guarantee” of Bear Stearns MBS exposure to JP Morgan. Fed will eat it.
THe Feds 200 billion treasury for MBS swap available to investment banks. Fed will swap with you so you wont have to report more losses, the Fed will eat it.
THe Feds 200 billion worth of “free up” money at FNMA and Freddie. Dont worry FNMA or Freddie about solvency, the Fed will eat the provide it.
It is like giving chips to compulsive gambler. THe Feds moves to back up the financials to restore confidence has not and will not alleviate the problem. THe gamblers need to take the losses. The Fed loaned is loaning financials money using the same bad collateral that got us here in the first place.
Nice work. Now the taxpayer covers it by having to guarantee the treasuries issued in return.
Deja vu. Doesn’t anyone remember the early 1990’s Resolution Trust Company and the load of no-income-qualifiying loans they got dumped on them? The federal government absorbed and “disposed” of over $458 Billion in property. How about the interest rate crisis of the early 1980’s which left foreclosures on every block? There’s nothing new here, its just another real estate cycle.
But, but, but the Fed has already given away over half of their reserves!!!
“This disgusting largess at taxpayer expense was partially offset by the Fed selling another $12 billion of its Treasury bonds last week, taking this main asset of the Federal Reserve itself down to $548 billion, which means that they have sold a full third of their ownership of Treasury bonds”