RMBS Delinquencies Continue Slow Descent
Servicers need to pay more attention to changes in home prices and how they relate to delinquency rates.
Positive home price trends in many areas of the country are among the key factors expected to drive further improvements in the performance of securitized residential mortgage loans, according to Fitch Ratings.
Delinquencies for U.S. residential mortgage-backed securities “have and will continue their slow decline” in 2013, the ratings agency said.
The Fitch Ratings new mortgage market index that measures the percentage of loans that are seriously delinquent among U.S. private-label, securitized mortgage loans shows the 60-plus day delinquency improved to 28.6% by the end of the fourth quarter of 2012, compared to 30.6% at the end of the same quarter in 2011.
Grant Bailey, managing director at Fitch, argues that a roughly 5% increase in home prices nationally throughout 2012 was one of the positive factors that contributed to improved housing market fundamentals along with low mortgage rates and a lower percentage of distressed property liquidations.
He recognizes that alongside home prices “the most notable factor driving improved delinquency performance” has been the crisis-induced stringency in the selection of new borrowers and massive loan modifications.
The story changes regionally, however, and so does mortgage delinquency risk.
For example, an over 7% increase in home prices in California from the start of 2012 to the beginning of 4Q12 Bailey said, indicate improvements in this market are likely to continue.
Fitch warns about future delinquencies in some regions where the ratings agency still sees high RMBS delinquency risk.
In particular, argues Bailey, the Northeast has not yet experienced the significant devaluations seen in the rest of the country “and as such is vulnerable to further home price declines.”
Going forward, however, Fitch’s outlook of market fundamentals based on price changes as measured by its proprietary Sustainable Home Price model and how prices affect the U.S. RMBS market are cautiously optimistic.
Fitch said its RMBS analysis adjusts a property’s current price to its sustainable value to allow for a forward-looking, countercyclical view on the potential for negative equity when projecting defaults and losses. Borrower equity in the home is calculated based on the lower of the purchase price or appraisal value and the value determined by Fitch’s sustainable home price model.
Earlier in January Fitch reported national prices rose by more than 2% marking “their largest gain since before the market peak,” growing in consecutive quarters for only the second time since 2006.
“Despite this momentum,” analysts wrote, because price growth is driven by technical factors such as low rates and lack of supply that “is likely to be muted or even modestly negative in the near term as liquidation volumes increase” along with the supply especially in judicial foreclosure states where inventory has been off the market, “Fitch maintains a cautious outlook.”
Assuming macroeconomic conditions remain stable and moderate growth continues, Fitch said, “prices are unlikely to fall more than 2% nationally from current levels,” which bodes well for the overall mortgage market since sustainable loan-to-values help minimize loan losses.
But, at the same time this quarter’s forecast based on Fitch’s sustainable market value decline metric—which is designed to measure the borrower’s true equity in the property—has increased to approximately 10%, reflecting the agency’s view “that real prices remain overvalued.”
Regional performance and expectations vary. Home price changes in many of the hardest hit markets are at or below sustainable values, but “are posting impressive recoveries,” Fitch said. Meanwhile, some markets “that have lagged in their correction still appear overvalued on a fundamental basis.”
It is a positive development that months of remaining inventory, including foreclosure inventory, are declining.
Bailey finds improved housing market fundamentals are driving improvements in the delinquency rate “for both alt-A and subprime RMBS, along with post-2005 prime deals.”
Based on the current pace of liquidations, Fitch said, it would take 34 months to clear the current serious delinquencies compared to 44 months a year ago. “While positive, the improvement masks those markets with disproportionately large inventories that have yet to be cleared and where double-digit price declines are projected,” analysts wrote.