A new report on non-agency residential mortgage-backed securities has found that performance on nonprime mortgages has been improving even as delinquency on prime vintages has been on the decline.
Delinquency on prime RMBS that were issued prior to 2005 is continuing to increase. Roll-rates are 1.5 times higher than three years ago and remain near an all-time high, and total delinquency is about one-and-a-third times higher than in 2011.
At the same time, performance on Alt-A, subprime and recently issued prime pools has been improving.
Fitch Ratings, which issued the report, noted that adverse selection and structural features that are vulnerable to “tail-risk” are driving up the risk on prime RMBS.
“Recent performance deterioration is compounded by structural features in pre-2005 transactions,” the ratings agency said. “The dollar amount of senior class credit protection will continue to decline in most transactions due to: the lack of hard subordination floors (as found in recent RMBS); structures that pay scheduled principal pro rata to subordinate classes; and the lack of performance triggers that redirect unscheduled principal cash flows from subordinates to senior classes.”
Fitch said it downgraded 6 percent of all prime RMBS classes –mostly pre-2005, 15-year, fixed-rate transactions — and 14 percent of all classes remain on negative watch.
