Bear Stearns 2007 Outlook Cautions RMBS Performance
There has been a lot of talk about the risk layering seen in the underwriting of loan originations in recent years and how it has changed the dynamic of the market. And at its recent "Mortgage and Structured Products Conference: Outlook 2007," Bear Stearns explained some implications that trend has for residential mortgage-backed securities.
According to Steven Bergantino, a managing director at the company, while the market has been focusing primarily on subprime RMBS risks due to the "markedly bad" performance seen in the 2006 vintage, risk layering has created a need for increased attention to and loan-level analysis of the alternative-A credit sector as well, "blurring" the distinction between the two.
"The layering of risk characteristics can significantly worsen the credit performance of alt-A mortgages," Mr. Bergantino said in his presentation.
Other notable conclusions Bear Stearns researchers came to in examining the different layers of underwriting characteristics as part of the firm's modeling efforts include the following:
* FICO scores are just one of a number of primary drivers of credit performance. Others include documentation, combined loan-to-value ratio and occupancy.
* While documentation and occupancy requirements placed on no-money-down borrowers have "weakened significantly" there has been "no compensating increase in credit scores." (Figures presented by Bear at the conference indicate Fair Isaac & Co. credit scores have remained relatively stable, having decreased only slightly between 2003 and 2006.)
* Limited documentation, no-money-down borrowers with strong credit histories "are 50% to 70% less likely to default than borrowers with weaker credit histories." However, "FICO scores are significantly less predictive of future probability of default than whether or not borrowers have documented their level and source of income."
*More than 45% of 2006 vintage alt-A loans had negative amortization, compared to 2.2% in 2003.
* Combined loan-to-value ratios above 80% have become more frequent. More than 42% of alt-A credit mortgages had combined LTVs greater than 80% in the 2006 vintage, compared to 29% in the 2003 vintage.
* The extent to which alt-A loans have limited documentation has increased to 84% in the 2006 vintage from 67% in the 2003 vintage.
* Borrowers "with no equity at stake are much more likely to default than borrowers with even a 10% equity position." But "documenting borrowers' ability to service their mortgages can significantly reduce their risk." (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com