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U.S. RMBS Defaults Are Up, U.K. Down

Default rates for most U.S. residential mortgage-backed securities collateral are expected to continue rising but the default rates for most European RMBS collateral outside of Spain are forecast to decline, according to a survey of structured finance market participants' valuation assumptions by Standard & Poor's Valuation & Risk Strategies Group.

According to a report on the survey by S&P's London office, 12-month default-rate assumptions on certain U.S. RMBS collateral have doubled since the previous quarterly survey.

In the United Kingdom, in contrast, the forecast for nonconforming loan RMBS collateral default rates on average across vintages dropped to 4.61% in the fourth quarter from 9% in the third quarter. Forecasts for prime U.K. RMBS collateral were 1.09%, down from 2% the previous quarter. Forecasts for Dutch and Italian defaults both registered declines and the forecast for Spanish default expectations was stable, according to S&P.

Loss severity estimates for the next 12 months have increased for all U.S. RMBS collateral. U.S. prime vintages from 2005 through 2007 had an average 59% loss severity forecast, up from 47% in the previous survey. U.S. subprime vintages from 2005 through 2007 had an average 64% loss severity forecast, up from 62% the previous quarter.

In the United Kingdom, 12-month loss severity estimates for prime RMBS collateral fell to 26.7% from 27.6% and estimates for nonconforming RMBS collateral dropped to 33% from 36%.

"The figures from the latest survey show that there remain concerns for the performance of some classes of mortgage collateral, particularly in the U.S. and that further there remain some disparities between the valuation approaches of different sides of the market," said Peter Jones, senior director of Valuations & Risk Strategies, a part of S&P's Fixed Income Risk Management Services division. He said security and portfolio valuation has been challenging for the past 18 months but the latest survey implies "signs of converging valuation methodologies."

In the United States, the rating agency indicated that respondents expect to see the new-issue securitization market to make a comeback this year but less than $10 billion worth of one. This total excludes real estate mortgage investment conduit securities known as re-REMICs, which resecuritize existing RMBS.

In the United Kingdom how much issuance is expected depends on who one talks to.

The buy side expects 1 billion to 10 billion ($1.6 billion to $16 billion) of new issuance, while the sell side predicts as much as 25 billion to 100 billion ($39.1 billion to $156 billion). This contributes to a consensus that new U.K. issuance this year will total between 11 billion and 25 billion, the equivalent of $17.2 billion to $39.1 billion, according to S&P.

Respondents in both Europe and the U.S. expect home prices to bottom out in 2011. In the U.K., house prices are expected to decline about 5.8% while in the U.S. a 5% drop is expected. "In contrast to the previous survey, European structured finance market participants are in broad agreement when the U.K., Dutch and Italian national housing markets will trough, with 50% predicting the fourth quarter of 2010," S&P said. "However, they do not expect the Spanish housing market to trough until 2011."

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