DBRS: Subprime Exposure Concentrated Across Six Metro Areas

The distribution of recent vintage subprime loans appears to be concentrated across six major metropolitan areas, according to a recent report by credit ratings agency DBRS.

In its report, "Analysis of Subprime Loan Concentration by Major Metropolitan Area and Corresponding Economic and HPA Trends," DBRS reviewed the distribution of subprime loans by MMA for recent vintages (transactions closing in the later half of 2005 through the end of 2006), given the declining hope price appreciation environment occurring in most MMAs and the predisposition of subprime loan performance to correlate with HPA rates.

According to the report, potentially more than one-third of subprime exposure on a dollar basis is concentrated across Los Angeles (which DBRS estimates at 18.11%), San Francisco (6.24%), New York (8.82%), Chicago (3.27%), Washington (4.92%) and Miami (3.47%).

All of these areas are currently experiencing declining HPA rates based on the most recent data from the Office of Federal Housing Enterprise Oversight and Fiserv Case Shiller Weiss.

Although borrowers in earlier vintages were also highly leveraged, they "de-levered" on a market value basis as slowing, but still historically strong HPA rates enabled them to build property equity. However, in 2006, HPA rates began to deteriorate quickly in many MMAs and are currently flat-to-negative.

According to the report, local economic factors such as unemployment and bankruptcy trends don't appear to be a significant factor in the sharp decline in HPA rates for these six areas. Specifically, unemployment trends in these areas have remained relatively stable.

Going forward, however, marginal changes in such factors as unemployment could worsen already weak subprime loan performances.

Given the decline in property values in many areas and the higher level of interest rates relative to those rates at the time of vintage origination, delinquencies, according to DBRS, may continue to rise if borrowers have difficulty refinancing their loans.

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