Nonprime Delinquency Spikes in Some Areas

While the performance of securitized, nonagency subprime and Alt-A loans improved from October 2004 to October 2005 on the national level, Friedman, Billings, Ramsey & Co. said it identified 56 “chronically weak” metropolitan statistical areas across 16 states.

Subprime loans in those areas have a weighted-average default rate of 13.82% — more than double the national rate of 6.16%. The loans appear in 97.9% of subprime residential-mortgage backed securities and have an aggregate unpaid balance of $469.2 billion. MSAs with the highest subprime default rates were Cleveland, Ohio, with 20,02%, followed by 18.38% for Charleston, S.C., and 17.82% for Youngstown, Ohio, according to Friedman’s latest Fixed-Income Research report.

The researchers forecast national subprime default rates to worsen to 6.68% in October 2006 due to “the steep declines in payroll employment in eight of the 10 MSAs affected by Katrina, the continued attrition of payroll employment and accretion of household unemployment rates in the 56 MSAs, and the natural aging of the stock of subprime loans originated in 2004 and 2005.”

Default rates generally rose in MSAs affected by Katrina and Rita, the researchers said, noting that they “were surprised to discover that servicers generally elected to report late payments as delinquent in October even though they may be offering special relief measures to borrowers.”

Alt-A loans in the 56 MSAs were reported to have a default rate of 2.54% — over three times the national average of 0.77% — and form a part of 93.4% Alt-A RMBS, with an aggregate unpaid principal of $469.2 billion. Sharon, Penn., Wheeling, W.V., and South Bend, Ind., had the highest default rates at 9.08%, 7.17% and 6.41%.

The researchers suggested that portfolio managers may improve the credit performance of portfolios by reducing holdings of securities with exposure of 10% or more to the 56 areas.

“It is striking that even newly issued nonagency RMBS with proportions of loans in the 56 MSAs of 10% or more experience significantly higher default rates, cumulative loss rates, and loss severities than those with proportions of less than 10%,” the researchers said.