Following three years of improvement, performance on subprime residential mortgage-backed securities has begun to wane. Behind the deterioration are changes in the makeup of the collateral, declining home prices and diminishing credit enhancement.
A new report indicates that subprime RMBS performance had been “improving notably” since 2009.
But the rate of improvement is diminishing.
Fitch Ratings, which released the report Monday, said that it has recently observed “that the improvement has tempered for loans originated from 2005-2007, while earlier vintage loans have shown little to no improvement.”
Hurting the improvement has been the changing composition of the collateral, which the New York-based firm said is leading to adverse selection.
Also contributing to the weakening performance are home prices, which fell 4 percent last year. The ratings agency projects that national home prices still have another 5 to 10 percent to fall.
“The report also points to historically high loss severities and relatively thin remaining credit enhancement as drivers of Fitch’s ratings on subprime classes,” the report stated. “Fitch cites high loan-to-value ratios, relatively small loan balances, and extending liquidation timelines as causes of elevated loss severities on liquidated loans (currently 77 percent). Senior RMBS classes have lost credit enhancement through a combination of high collateral losses and the redirection of principal toward subordinate classes.”
