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Moody's: Deterioration Continues for Prime-Quality Mortgage Pools

Serious delinquencies -- borrowers more than 60 days in arrears -- for U.S. jumbo mortgages increased 16 percent during the fourth quarter of 2006 compared to year-ago levels, according to a report issued recently by Moody's Investors Service. The report also found deterioration in early-stage (30-59 days) delinquencies among jumbo borrowers, with early-stage delinquencies rising on a year-over-year basis for the first time in the last two years. The uptick in jumbo delinquencies could indicate that the recent troubles in the subprime market may be spilling into certain prime markets, although numerous sources have told HW it is too early to tell for certain. Jumbo borrowers typically have very good credit, but have large mortgage balances that exceed the conforming loan limits set by Fannie Mae and Freddie Mac. Delinquencies among jumbo mortgages reached their lowest point in history during the third quarter of 2005, the report noted, and authors Peter McNally and Bruce Fabrikant from Moody's were quick to point out in their analysis of the U.S. jumbo mortgage market that the observed increases in delinquent borrowers across the back half of 2006 represented a "relatively benign" amount of the jumbo mortgage pool in absolute terms. "Since the fourth quarter of 2005, serious delinquencies have increased about 4½ basis points to reach 0.330% [sic]," McNally and Fabrikant said in the report. "As a point of comparison, serious delinquencies in the home equity sector, according to Moody's Home Equity Index Composite, were 7.62% [sic] during the third quarter of 2006 (the most recent report)."
Reason to worry? While still low by historical standards, the uptick in jumbo delinquencies has some in the industry worried. "These are prime borrowers we're talking about here," said one source, on HW's customary condition on anonymity. "These are the guys who shouldn't be defaulting -- it may be a trickle of delinquencies now, but it's still more than before, and that should lead anyone in the industry to ask why." Pacific Investment Management Co., a Newport Beach, Calif. based fund manager, circulated a report to its clients on March 16 that suggested the current troubles in subprime might affect prime jumbo mortgage markets, although any potential impact would be likely be limited. "It is likely that the poor performance we have seen in subprime loans will carry over to some degree into the most aggressively underwritten loans in the Alt-A and possibly Jumbo prime markets,'' Pimco said in the report. "We do not believe that prime loans will be materially affected.'' The topic of "subprime contagion" has been perhaps the hottest topic around water cooler and internet chat boards across the industry during the past few weeks, with numerous industry heavyweights jumping in to say fears of a meltdown in other credit sectors similar to what is taking place in subprime lending are overblown. "Because on an objective analysis of the facts, talk of the 'subprime contagion' spreading to the Alt-A sector of the mortgage market is, in our view, overblown," Michael Perry, chief executive of Pasadena-based IndyMac, said in a statement late Thursday. Jumbo foreclosures and REOs skyrocket Perry's views have been echoed by many in the mortgage banking industry, but others say its hard to argue with some of the early numbers emerging in the jumbo market: foreclosure and REO rates have seen dramatic increases among jumbo borrowers, rising 51 percent and 85 percent respectively over last year's levels, according to the Moody's report. Most of that increase was driven by adjustable-rate mortgages, say industry insiders that spoke with HW. Analysis by Moody's would seem to agree with industry sentiment. "The 60+ delinquency rate of the 2006 [Jumbo] ARM vintage has thus far underperformed other vintages since 2002 and is continuing to closely track loans originated in 2001," said Moody's in its report. "Fixed rate [Jumbo] loans from 2006, which make up about 58% [sic] of the pools added to the index in that year, are still performing in line with other recent FRM vintages." Both McNally and Fabrikant say that while delinquencies are trending upwards, it's too early to tell how delinquences in 2006 jumbo mortgages will translate into losses, given that net losses on Jumbo pools are typically so low to begin with. "I really hope and have to believe that this is nothing but a return to normalcy," said one broker, who asked his name not be used. "But that's what we heard when subprime started to deteriorate, and look where that got us." To read the full report on Jumbo mortgage performance, please visit http://www.moodys.com.
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