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Amherst finds mortgage market underestimates looming defaults

Amherst Securities Group said the market is not taking into consideration the high likelihood of potential defaults on performing or re-performing mortgages when estimating future losses on these loans. Mortgage-backed securities analysts at the fixed income dealer took a look at $1.3 trillion in outstanding nonagency mortgages from a year ago to see how they’re doing as of November 2010. They found that the $485 billion of nonperforming loans, those more than 60 days delinquent, dropped to $414 billion through either modification or liquidation. However, Amherst said that bucket alone does not detail the lurking risk. Re-performing borrowers stand a very good chance of redefaulting, according to Amherst. For the Home Affordable Modification Program, alone, the Treasury Department has estimated a 40% redefault rate. Borrowers classified as performing could very well be underwater with home prices dropping so far from their peaks in 2006. Across all loan products, 9.9% of the mortgages pre-paid, compared to 13.7% that went into default. “Thus, even in a year with low mortgage rates at generational lows, more loans that had never before missed two payments transitioned to default than pre-paid,” Amherst said. “No matter how you look at it, borrowers with substantially negative equity are very vulnerable to default.” Analysts concluded that simply looking at the amount of delinquencies will not give the market a safe estimate of what future losses might be. “By focusing only on delinquent loans, the market is underestimating the size of the housing problem and the potential losses to bondholders if further policy actions are not taken,” Amherst said. Write to Jon Prior.

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