The occurrence of interest shortfalls within residential mortgage-backed securitizations continues to grow, analysts at Morningstar noted in an annual review.

Analysts Brian Grow and Brian Alan reviewed sample data and found that 21.8% of RMBS deals in 2012 experienced a short fall in at least one tranche. In August, that figure stood at 18.6%. 

Interest shortfalls among junior tranches had the largest six-month increase when analyzing tranches. Junior tranches (45.4%) have the highest prevalence of shortfalls compared to senior (19.7%) and mezzanine (31.4%) tranches. The most recent vintages — 2008 and after — expected a large increase in shortfalls, growing to 233.3%, but this category also had the smallest sample size of only 138 classes.

Additionally, prime deals have posted the largest jump from July to December, based on collateral type, (68.7%) but interest shortfalls are still more likely to occur in subprime deals, the analysts noted. 

For a more comprehensive looks at the RMBS environment, the current analysis accounted for all active bonds in the subset regardless of whether the bond was experiencing a write-down.

For instance, 7.3% of classes had an interest shortfall in December of 2012. 

Click on the pie chart to view the December 2012 status by class.


For bonds recovering from November to December, almost 88% had three or fewer months of interest shortfalls immediately preceding the repayment.

Going forward, Morningstar will continue to monitor the impact of interest shortfalls in RMBS and factor the type of shortfall — credit or liquidity — into future reviews of bonds.