Occurrences of interest shortfalls in residential mortgage-backed securities continue to steadily rise, according to Morningstar Credit Ratings.

From January to March, incidences of interest shortfalls increased by nearly 3% at the tranche level.

“Subprime collateral continues to have the highest likelihood of an interest shortfall. However, instances from prime collateral are on the rise,” the report noted.

The likelihood of repayment was impacted by both the amount and duration of the shortfall with smaller and shorter shortfalls more likely to recover.

For bonds receiving from February to March, nearly 85% had three or fewer months of interest shortfalls immediately preceding the repayment.

In order to focus strictly on those classes that were adversely affected by interest shortfalls, Morningstar removed any tranches that had experienced an actual or implied principal write-down.

As a result, 6.2% of all classes had an interest shortfall in March, up from 6% in January and also up from 5.7% in October.

Junior tranches had the largest three-month increase of 10.5% when analyzing by tranche type.

“The overall prevalence of interest shortfall is actually lower for junior tranches than for mezzanine tranches in our analysis and that is because our sample omitted tranches that had experienced an actual or unrealized loss,” according to the report. 

Meanwhile, the 2007 vintage experienced a large increase in occurrences of interest shortfalls. However, no clear trend emerged when looking at deals by vintage.