Alt-A Performance Gets Much Worse in May

Problems are continuing to grow sharply among Alt-A borrowers, despite a dearth of pending rate resets, underscoring just how much home price depreciation is affecting borrowers in key housing markets nationwide. A new report released by Clayton Fixed Income Services, Inc. on Wednesday afternoon found that 60+ day delinquency percentages and roll rates increased in every vintage during May among Alt-A loans, while cure rates have declined only for 2003 and 2007 vintages. The picture being painted for Alt-A is increasingly beginning to look a whole lot like subprime, as a result, even if peaking resets in the loan class aren't expected until the middle of next year. In particular, loss severity continues to ratchet upward -- a trend that portends some likely further reassessment of rating models at each of the major credit rating agencies, as they catch up with the data. Loss severity -- the average amount lost relative to unpaid principal balance -- reached 41.4 percent for all Alt-A first liens in REO during the most recent rolling six month period through May, Clayton said; that was up from a 37.6 percent rolling average one month earlier, and compares to a similar 49 percent loss severity average for subprime first liens liquidated in REO through May. Those numbers make Standard & Poor's Ratings Services latest assumption of 35 percent loss severity on Alt-A loans, only one month old, already start to look a little too conservative. The rating agency's updated loss severity assumption was one key reason the agency cut ratings of 1,326 Alt-A residential mortgage-backed securities in late May -- and put another 567 AAA-rated tranches on negative ratings watch. We'd speculated in May that S&P's loss assumptions were yet too conservative; given the data now available, a ratings cut for any AAA classes deemed at risk one month ago would seem to be a foregone conclusion for most investors. Add in soaring borrower defaults, and the picture doesn't get much better. Clayton reported that the 2006 vintage saw 60+ day borrower deliquencies among Alt-A first liens reach 21.22 percent in May, up 10.5 percent in a single month; 2007 fared even worse, with 60+ day delinquencies ratcheting up 22 percent to 18.55 percent. Even the 2004 Alt-A vintage, what's left of it, is defaulting at a fast pace: 60+ day delinquencies in the vintage shot up by nearly 24 percent in just one month. The problem isn't rate resets of adjustable-rate mortgages, either, a point we've been hammering for some time. Rather, rapidly falling home prices and a weakening economy are the chief culprits here. "Amid all the attention being paid to rate adjustments, however, it’s important to note that out of all the active delinquent ARM loans in Clayton's portfolio, approximately 70 percent were already delinquent prior to the first rate change date," analysts at the firm noted in their report. For more information, visit http://www.clayton.com.

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