Fitch Takes Action on Older Subprime Mortgage Securitizations

Fitch Ratings took action on thousands of classes of subprime residential mortgage-backed securities (RMBS) issued prior to 2005, including many downgrades of some classes further into triple-C and single-D junk territory and affirmations of other triple-A classes.

The actions come as part of Fitch’s ongoing adjustments for deteriorating subprime performance. They indicate RMBS originated before the height of the housing bubble have yet to reach the full extent of default-related losses.

Fitch said it expects losses as a percentage of the original pool balance of 6.3%, 4.5% and 6.3% for the pre-2003, 2003 and 2004 vintages, respectively. Of the remaining pool balance of these vintages, on the other hand, Fitch expects losses of 25%, 23% and 28%, respectively.

The projected losses factor in an expected 12.5% fall in national house prices through the second quarter — which ended days ago — and 36% in California alone. Fitch doesn’t expect stability in housing prices until the second half of next year.

With heavy losses in house values, many homeowners still find themselves with negative equity years after origination. Fitch estimates 16% of the remaining performing borrowers in the 2004 vintage are sitting on negative equity — meaning they owe more on the house than it’s currently worth. The rating agency also projects that 11% of all transactions prior to 2005 bear negative equity today, although it acknowledged its estimates are likely understated since they don’t reflect any second liens or home equity lines of credit taken out by the borrowers after the security’s issuance.

With all that negative equity and unemployment that has increased to 9.5%, according to a US Labor Department bulletin today, borrowers are moving into delinquency status at an alarming rate. The net roll-rates for loans becoming delinquent in the pre-2005 subprime vintages in the first five months of 2009 are nearly double the rate seen during the same time in 2008, Fitch said.

Along with delinquency comes increased modification efforts. Fitch estimates 8% of the pre-2005 vintage mortgages reported as “current” at one point had terms modified.

“However, the performance to date of modified loans continues to raise concerns about the sustainability of the modifications due possibly to an insufficient emphasis on the borrower’s overall financial debt burden and the borrower’s willingness to stay with the property due to their current equity position,” Fitch said in a statement.

For example, re-default rates on modified loans have topped 50% within 12 months of modification, with Fitch seeing 65-75% re-default “likely” after 12 months.

Write to Diana Golobay.