S&P: U.S. Subprime Market Correction Continues

The appetite for U.S. subprime loans from the secondary market has exceeded demand in recent quarters, encouraging an erosion in underwriting standards, Standard & Poor’s Ratings Services said in a recent report. The report, U.S. Subprime Market Continues Correction As Issuers Strengthen Underwriting Standards, notes that early payment defaults and increased early delinquencies in the 2006 vintage have been key factors in evaluating current subprime performance. Standard & Poor’s said it sought evidence that corroborates recent industry claims of tightened underwriting standards, with mixed results. “We conclude that while there is evidence of improvement with regard to documentation, other results remain mixed,” said George Kimmel, a director with Standard & Poor’s Residential Mortgage-Backed Securities Group. “Affordability products within the subprime market continue to evolve as longer-term loans remain popular.”

The U.S. subprime market volume issuance rated by Standard & Poor’s declined moderately between 2005 and 2006, but fourth-quarter 2006 data showed that the slowdown’s pace declined from the previous quarter. Standard & Poor’s rated approximately $99.0 billion in subprime RMBS during the fourth quarter, a decrease of only 1.7 percent from third-quarter 2006. However, it represented a 28.7 percent decline in volume from the record-setting issuance of fourth-quarter 2005. Issuance for 2006 as a whole of approximately $420.6 billion fell 7 percent from $460 billion in 2005. “Thus, issuance is down moderately,” Kimmel said, “and the decline is expected to continue as the subprime industry goes through a period of consolidation while it strives to toughen underwriting standards.” For more information, visit http://www.standardandpoors.com.

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