Prime Jumbos Showing Strain: S&P

Prime jumbos are beginning to show signs of credit strain, adding to growing trouble already apparent in the subprime and Alt-A mortgage sectors, according to data released Friday by Standard & Poor’s Ratings Services.

U.S. prime jumbo RMBS deals saw recent vintage delinquencies increase during July, relative to June’s totals; 2006 vintage prime jumbos saw delinquencies increase 13.2 percent, while the 2007 vintage saw delinquencies rise 7.3 percent. Both jumps came in just one month.

In addition to new delinquencies, serious delinquencies have continued to rise as well, according to S&P: DQs 90+ days including foreclosures rose 6.6 percent for the 2005 vintage, 11.7 percent for 2006, and 3.1% percent for 2007. (Again, note these jumps are in just one month, between June and July).

While overall delinquencies still remain low — 2006 prime jumbos recorded a serious delinquency rate of 2.48 percent, for example, and cumulative losses in recent vintages haven’t yet come close to even 50 basis points yet — the sharp jump in troubled borrowers in higher-balance loans is telling.

For one thing, an REO broker we spoke with in California’s inland empire told HW Friday that he’s seen a dramatic pickup in broker price opinion orders in the $800,000 to $1,000,000 range in the past few months; while certainly not conclusive, the story anecdotally suggests that a growing number of prime jumbo mortgages are facing growing strain as property values plummet in key areas. Broker price opinions are commonly used by banks, servicers and investors ahead of a borrower’s default to assess the condition and price of the property.

“Borrowers are walking away,” he said. “I know it’s been reported, but I’m seeing even high-net-worth borrowers decide that paying on that sort of debt simply doesn’t make sense. They’d rather conserve cash or put in into something more useful.”

But it’s worth noting that cumulative losses in prime jumbo deals have substantially less credit enhancement — these are good-credit borrowers, often with substantial assets, after all — meaning that a cumulative loss rate of 1 percent in a given vintage may equate to a similar (or worse) depth of loss relative a subprime deal showing cumulative losses of 10 percent.

It’s also worth noting, relative to yesterday’s summary of subprime and Alt-A performance data, that delinquencies are worsening a little ahead of typical seasonality; traditionally, default activity slows in the summer and begins to pick up around August or September. Seeing such sharp jumps this early on surprised more than a few HW sources, to say the least.

Side note: S&P also reported on closed-end second liens and HELOCs, which found that performance for second was (generally speaking) far better than you might expect: in fact, the 2007 HELOC vintage saw delinquencies drop by almost 8 percent on a month-to-month comparison basis relative to June’s total. Read the S&P report.

Related links: S&P prime jumbo summary