RMBS performance rides home price wave
Despite improvement, results vary regionally
Despite U.S. home prices and residential mortgage-backed securities performances improving in recent months, the overall improvement rate continues to vary from region to region, pointing to a strong correlation between home price gains and loan performance.
Home prices have grown nearly 17% since 2011, which positively impacted mortgage performance and its effect on mortgage securities, the latest Fitch Ratings report revealed.
"Regions with larger price gains have experienced greater improvements in borrower delinquencies and prepayment rates, as well as liquidation timelines and loss severities on liquidated properties," the report said.
Certain regions witnessed as much as a 40% increase, with California, Florida, Arizona and Nevada posting the largest gains.
But areas like the Northeast experienced little to no price increase and exhibited only marginal improvement.
Meanwhile, home prices grew the most in areas where prices declined the most from the peaks reached in 2006.
"These regions typically allow for nonjudicial foreclosures, leading to shorter liquidation timelines and higher resolution rates of distressed inventory to date. Conversely, regions that experienced little to no decline in prices between 2006 and 2011 have generally shown only modest price increases since 2011," the report explained.
And where home prices recorded improvement aggregate mortgage performance did also.
While national roll rates improved by approximately 28% between 2011 and 2013, regions with larger price increases saw greater improvement in borrowers’ loan-to-value ratios and greater improvement in new delinquency rates.
Regions with meager improvements in home prices only modestly improved in roll rates. This is compared to regions in the 40% home price increase group that saw roll rates improve by nearly 50%.
"Borrowers with more equity can more easily sell the property if under duress or refinance to lower their monthly payment. It is therefore not surprising that when home prices rise, borrower performance improves due to lower loan-to-value (LTV) ratios," the Fitch report said.
However, the sustainability of the growth is expected to slowly moderate over the next year.
"The recent rapid price increases in several regions are not likely to continue at the current pace, and, as prices begin to level off, the improvement in performance will similarly dissipate," the report stated.