Subprime Mortgage Performance Improving as Delinquencies Drop
The performance of historical subprime mortgages is improving according to two separate reports from Moody's Investors Service and the Royal Bank of Scotland (RBS). And the rate of homeowners behind on their subprime mortgage is lower across all levels of days past due, albeit at different speeds. Moody's senior analyst Peter McNally notes in today's weekly credit outlook that "the new loan performance trend is a credit positive development for subprime RMBS," and cites the uptick of loans being processed through the Home Affordable Modification Program (HAMP) as the primary reason. However, McNally sounded a warning that without principal reduction under what RBS refers to as HAMP 2.0, the positive numbers, which are adjusted in both reports to take into account season slowdowns, delinquencies may reverse trend: "We currently expect that 50%-70% of permanent modifications will eventually re-default," he said. "Because negative equity is such a significant driver of loan defaults, the ultimate level of re-defaults will depend heavily on the successful implementation of principal forgiveness." The results of Moody's is echoed in last week's Securitized Product Insights, a new monthly publication from the securitization team at the Royal Bank of Scotland. In the report analysts Paul Jablansky, Desmond Macauley, and Ying Wang examined specific non-agency subprime performance. They find that the rate of subprime mortages moving from current to delinquent is down from above 8.5%, at the end of 2008, to below 5% today. "After adjusting for seasonality and modifications, subprime roll rates have improved by 10% and 15% on the 2006 and 2007 vintages respectively in the past three months. "For the option ARM and Alt-A sectors, although the recovery was weaker than expectations based on seasonal trend, the roll rates stood at low levels relative to their historical peaks in early 2009," the researchers added. Additionally, according to Moody’s 2005-2008 Vintage RMBS Loss Tracker, the total delinquency rate among 2005-2008 vintage RMBS transactions, after rising steadily for nearly four years, peaked at 54.4% in January 2010. Over the past three months, the delinquency rate declined, resting at 51.5% as of April. Write to Jacob Gaffney.