After spiking dramatically higher in April and May, the pace of defaults for the most troubled area of the mortgage market -- non-conforming mortgages -- slowed significantly in June, according an analysis of performance data on jumbo prime, Alternative-A, and subprime loans by Five Bridges Advisors. Default rates should steadily rise until they peak in the first quarter of 2010.
By Robert Stowe England
July 22, 2009
The pace of credit deterioration for securitized prime, Alternative A (Alt-A or low documentation), and subprime mortgages – which had accelerated in April and May – slowed “significantly” in June, according to an analysis of home loan performance data from Black Box Logic, LLC by Five Bridges Advisors, LLC. Both firms are based in Bethesda, Maryland.
“The irregular and extreme spikes of recent months were conspicuously absent in June,” reports Mortgage Flash, which is published monthly by Five Bridges.
Nevertheless, during June default rates for prime, Alt-A and subprime mortgages rose to new highs. Given the rising levels of unemployment and the expectation of even higher unemployment rates, Five Bridges expects “steady further erosion of mortgage credit.”
Five Bridges reiterated its outlook that the default rates will peak in the first quarter of 2010.
Prime, Alt-A, and subprime loans are generally described as being non-conforming loans because they vary in one way or another from the so-called agency mortgage loans backed by Fannie Mae and Freddie Mac, which are described as conforming loans.
The data analyzed by Five Bridges is also for securitized mortgages; that is; they are loans sold by the originator into the secondary market to be pooled and divided into tranches of mortgage-backed securities, which are then sold to investors.
The securities issued on pools of these non-conforming mortgages are described as private label or non-agency securities.
Securitized loans are designated as such to distinguish them from portfolio loans, which are held by the originator, who retains the credit risks associated with the loans.
Prime mortgages, also known as jumbo primes, are loans with balances above the current conforming loan limit at the time they were originated or refinanced. Currently, the conforming loan limit is the mortgage limit of $417,000 for most markets and $625,500 in high cost areas as determined by the Federal Housing Finance Agency.
Alt-A mortgages are more risky than prime loans, often because they have less documentation but are less risky than subprime loans. Both types of loans are considered to have lower credit quality than those backed by Fannie Mae and Freddie Mac.
The default rate on prime jumbo loans in June rose 56 basis points (56/100th of a percentage point) from the May level to 9.37 percent. The default rate had soared 214 basis points in May and 225 basis points in April.
Historically, prime loans have had default rate of close to 1 percent or less.
The default rate on Alt-A loans rose by 76 basis points from May to 25.4 percent in June. Again, this is significantly less than the monthly increase for May and April.
However, this default rate represents a 10-fold increase over the peak defaults in previous cycles, according to Five Bridges. From 2000 to 2007, default rates of Alt-A loans were 3 percent or less, sometimes falling below 1 percent.
The default rate on subprime loans rose by 48 basis points from May to 36.1 percent in June. This again was much less than the sharp increases in May and June.
Subprime defaults peaked at 10.05 percent in the last recession of 2001-2002.
Five Bridges’ newsletter Mortgage Flash is not available publicly. The email address for the newsletter is email@example.com firstname.lastname@example.org .
The Web site for Five Bridges Advisors is http://www.fivebridgesllc.com/
Copyright © 2009 by Robert Stowe England