S&P: Subprime RMBS Losses Will Rival 2000 Vintage

According to a report issued recently by Standard & Poor’s, the rating agency said it expects losses residential mortgage-backed securities issued in 2006 will fall between 5.25 percent and 7.75 percent, the worst performance for a subprime RMBS vintage since 2000. The S&P report also noted that while most ‘BBB’ and ‘BBB-‘ rated classes are protected from losses, they are likely to see higher default rates than other similarly rated classes in recent history. “The number of total and serious delinquencies for the 2006 vintage is consistently higher than for deals issued between 2001 and 2005,” said credit analyst Michael Stock, a director in the U.S. RMBS ratings group at Standard & Poor’s. “However, the loans in the deals issued in early 2006 have nearly the same level of serious delinquencies after just 12 months of performance as those in the 2000 vintage, which had 6% in serious delinquencies after one year of performance.”

In addition to examining the early payment default trends of rated subprime transactions issued between 2000 and 2006, the report provides observations on the economic environment in which the 2000 and 2006 vintage deals were issued. For example, the 2006 deals contain loans made to borrowers with higher FICO scores than in the 2000 vintage. The newer transactions also include loans with larger balances, a factor that plays a role in the amount of losses in cases where a property needs to be liquidated. But the 2000 vintage has some advantages over the later deals as well. For example, interest rates were lower six years ago, with mortgage and LIBOR rates hitting record lows between 2002 and 2003. Mr. Stock also noted that voluntary prepayment speeds were also faster in 2000, and home price appreciation has slowed quickly in recent months. “Given our observations from our research, combined with our expectation that the U.S. economy will not experience a recession in the next two years, we believe 7.75 percent should be at the high end of our subprime loss assumption for the 2006 vintage,” Mr. Stock said. “Our loss assumption also considers the relatively weak housing market, and we assume that home price appreciation will be stagnant this year and that home prices will return to a more traditional growth rate of 3-4 percent after 2007.” The information above is contained in a detailed article, A Comparison Of 2000 And 2006 Subprime RMBS Vintages Sheds Light On Expected Performance, published March 22, 2007, on RatingsDirect, S&P’s research service. For more information, visit http://www.ratingsdirect.com.

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