The occurrence of interest shortfalls within residential mortgage-backed securities continue to rise, analysts at Morningstar revealed after reviewing August remittance data.
Analysts Brian Grow and Brian Alan reviewed sampled data and found that 18.6% of the deals in August experienced a shortfall in at least one tranche. In March, that figure stood at 13.4%. Interest shortfall increased in those five months even though 21.8% of March shortfalls recovered by their August remittance.
Interest shortfalls among junior tranches increased the most at 48% when analyzing by tranche type. Junior tranches (10.5%) have the highest prevalence of shortfalls compared to senior (1.7%) and mezzanine (8.3%) tranches. The most recent vintages — 2008 and after — experienced a large increase in shortfalls, growing to 9.1% in August from 4.7% in March.
“The changing status of bonds with interest shortfalls on a month over month basis supports (our) conclusion…that some interest shortfalls reflect credit issues, while others can be considered liquidity shortfalls, which are temporary and likely to be paid back,” Grow and Alan wrote in a research not. “This distinction is important to the rating of RMBS bonds.”
They added that only credit shortfalls will result in a rating change and liquidity shortfalls will not affect Morningstar’s ratings.