Alt-A Losses Outstripping Expectations, Moody's Says
Severe delinquencies on recent-vintage Alt-A RMBS are quickly getting worse than expected, Moody's Investors Service said earlier this week; the rating agency said worsening trends in Alt-A have forced it to undertake a revision of lifetime loss projections for 2006 and 2007 vintages, as a result. Moody's last revised its loss expectations for the Alt-A sector six months ago. As of Oct. 2008, serious delinquencies for Alt-A pools -- including option ARMs -- averaged 20.3 percent of current balance for the 2006 vintage and 17.5 percent for the 2007 vintage, up from 16.9 and 12.2 percent six months ago. At the same time, prepayment rates on these pools are at historical lows and are currently averaging in the mid to high single digits, Moody's noted. Serious delinquencies refers to mortgages more than 60 days in arrears, in this case. (In plain English, and keeping things simple: the prepayment picture here is important. Delinquencies as a percentage of current balance can go up as a matter of course as a loan pool seasons and borrowers prepay, and revintage, themselves. By stressing here that prepayments aren't just low, but really low, Moody's is saying that this statistical artifact is not driving the rise.) While cumulative losses have not yet risen as steeply as delinquencies, many pools are starting to show a sharp increase in the rate of loss realization, according to Moody's. And as the pace of liquidations has picked up, the performance data suggests worsening loss severities, as well. Alt-A mortgages have typically covered a wide spectrum of credit quality and performance ranging from near-prime to near-subprime credit quality, and that is also reflected in the performance data Moody's said it is seeing. Serious delinquencies for the stronger performing non-option ARM Alt-A pools (roughly 20 percent by pool count) from the 2006 vintage average 4.3 percent of current pool balance, Moody's said, as compared to 30.1 percent for the weaker deals (which represent roughly 40 percent of the vintage). The agency said it expectes loss estimates for the best-performing quintile of the deals from the 2006 vintage will fall around the area of 3 percent to 5 percent of outstanding collateral balance. In contrast, weaker deals from the 2007 vintage (comprising over a third of the 2007 vintage) are likely to have loss projections in excess of 20 percent. And that's for the non-option ARMs. Moody's said it is also updating its loss expectations on pools backed by option ARM loans, as well; and it's likely to be worse than the above estimates, given that the pace of delinquency build-up has recently outpaced that of regular Alt-A. The rating agency -- not surprisingly -- would only say that it expects loss projections for option ARMs, on average, to come in higher than the estimates applied to more vanilla Alt-A deals. At HW, we'd tend to side with those suggesting losses could be much higher than in other loan classes. While Moody's said it's too early to tell what sort of downgrades would come from updated loss estimates, it said it does expect "further negative rating actions and in some cases, multi-notch downgrades." Read the Moody's statement (registration req'd). Sidenote: Most in the market don't usually realize this, but the rating agencies also incorporate their loss estimates on residential real estate into whole loans held in portfolio, which means an update to lifetime loss figures could, potentially, exert downward pressure on core credit ratings at financial firms holding a good number of troubled loans in portfolio. We'll refrain from naming any such firms in this space. Write to Paul Jackson at firstname.lastname@example.org.