By Robert Stowe England
June 14, 2010
Subprime loan performance of mortgages held in private label residential mortgage-backed securities (RMBS) has finally improved for the first time after rising steadily for nearly four years.
Delinquencies in RMBS vintages from 2005 to 2008, which peaked at 54.4 percent in January 2010, began to decline over the last three months and fell to 51.5 percent as of April 2010, according to Moody's Investors Service.
"Subprime mortgage loan performance appears to have turned a corner over the past several months," writes Peter McNally, vice president and senior analyst at Moody's in the credit rating agency's Weekly Credit Outlook for June 14.
McNally notes that other classes of RMBS, jumbo prime and Alt-A and home equity, have also shown improvement, "though somewhat less pronounced."
McNally is crediting the Home Affordable Modification Program (HAMP) as "one contributor" to the improved loan performance for subprime mortgages underlying subprime RMBS.
"As HAMP ramped up in 2009, the number of seriously delinquent loans increased because loans that would otherwise have been foreclosed on and liquidated, instead waited for their placement into trial modifications," McNally writes.
The Moody's analyst notes that the number of active permanent modifications has more than doubled, rising from 117,301 in January to 299,092 in April.
"Each permanently modified loan improves the aggregate delinquency rate because upon modification the loan's stauts changes from delinquent to current," explained McNally.
Moody's reports that loan-level analysis of 641 subprime RMBS transactions issued in 2005 to 2008 shows that fewer loans have moved into delinquent status while more have moved from delinquent to current status.
Moody's analysis found that 24 percent of borrowers that were 30 days delinquent in February were current in March. By contrast, only about 15 percent of borrowers in a given month became current on their loans 30 days later during most of 2009.
McNally predicts that HAMP 2.0, which focuses on principal forgiveness for homeowners with underwater mortgages, may further reduce delinquency rates.
Despite these improvements, not all is rosy. Moody's currently expects that 50 percent to 70 percent of permanent modifications will eventually re-default. To the extent HAMP 2.0 can implement principal reductions, the re-defaults can be reduced, McNally concludes.