Many 90-Day Overdues Are Slow in Going into Foreclosure

New York-Due to a decline in home prices and other factors, Fitch Ratings is seeing a continued rise in defaults as defined by monthly rolls of 90-plus, foreclosure or REO on a national basis. There has been a moderating influence from foreclosure moratoriums, according to Roelof Slump, a managing director of RMBS at Fitch, who said many loans becoming 90 days delinquent are not quickly progressing through to foreclosure.

When comparing the characteristics of early pay defaulted loans against non-early pay defaulted loans, for subprime, Fitch reports that full doc and fixed percentages are higher for the non-EPD data set.

"Also, the EPD data set shows a higher percentage of purchase loans due to the impact of first-time homebuyers and some level of tighter guidelines for cash-out borrowers and perhaps cash outs benefiting some borrowers who were able to improve their financial position," said Mr. Slump, who provided a brief update on the housing market and RMBS during a conference call for Fitch's annual U.S. Housing and Multifamily Real Estate Summit.

"For the alt-A sector, Fitch sees that the greater percentage of full-doc loans provided for some better performance as a higher percentage of these loans appeared in the non-EPD grouping. Also a higher percentage of fixed-rate loans were evident in the non-EPD grouping for alt-A."

For the prime sector, Fitch observes the impact of reduced documentation, which did show up in the 2005-2007 vintages in contrast to many of the earlier vintages for prime. There are a significantly higher percentage of full-doc loans in the non-EPD grouping as well as more fixed-rate loans.

An increase in load modifications is taking place to deal with the delinquencies in the face of declining home prices. Fitch is studying the effect of these different types of loan mods and looking at the percentage of loans returning to 60-plus-days delinquent.

"We se a significant amount of redefaults generating generally by months six through 12," said Mr. Stump.

"As far as the principal forgiveness modification type is concerned, it has been successful at initially putting the borrower in a positive equity position, which may be impacting their willingness and ability to make payments. But there does remain the question of how the borrowers would react if home prices continue to fall further."

For residential mortgage-backed securities throughout this cycle, 50% of original AAAs for subprime from 2005-2007 vintages have been downgraded along with 69% for alt-A and 60% for prime.

In terms of outlook, Fitch said it expects these vintage securitizations will continue to underperform. "The level of ultimate modification activity and its affect on performance are still unclear. Also, the ultimate affect on loan performance and federal legislative proposals and regulatory initiatives remain uncertain," said Mr. Slump.

Based on the OFHEO Purchase Only Index, California has been leading Florida in home price declines, but California has seen some degree of moderation recently. But Fitch predicts it will see continued sensitivity in the employment picture and general state of the economy.

The market needs to see greater stability on the performance of RMBS, he said. On the positive side, there has been some improvement on the RMBS pricing side over the last two or three months, which indicates some strength of interest.

"The interest rate scenario is quite a significant issue to the extent an originator can come out with a coupon that works for the borrower. That obviously has to be economical for them in terms of different types of stresses from the ratings agencies and different concerns about inflation, which tends to push up longer rates.

"Probably it will be some time before the private-label RMBS market does return."

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