Moody's: Despite HE Trouble Spots, Serious Delinquency Rate Remains Low

The percentage of home equity loans that were seriously delinquent remained low by historical standards in the first quarter, according to Moody's Investors Service.

More troubling, however, is a rise in loan charge-offs. The charge-off rate in Moody's Home Equity Index Composite hovered at 1.3% in January and February, but jumped to 1.49% in March.

"The charge-off rate tends to be rather volatile, so it remains to be seen whether this increase is a temporary spike or whether the rate of charge-offs is trending higher," Moody's said.

And the performance of traditional home equity loans - just one component of the Moody's index - deteriorated in the first quarter of this year. And the increase comes despite heavy recent issuance, which should boost performance by refreshing the outstanding home equity universe with new, fresh loans that have not reached their peak seasoning level, Moody's said.

In fact, a major reason for the low overall delinquency rate in the Moody's index is that a high volume of recently issued securities means that new, unseasoned pools account for a big share of outstanding balance of home equity loans. Those deals tend to have low losses early in their lives, Moody's analysts noted.

"Another factor contributing to the low delinquency rate reflected in the HEIC has been the strong performance of the 2002 vintage subprime mortgage pools. Because subprime mortgage issuance was very heavy in 2002, these pools have a major impact on the overall index, comprising 36% of the index balance in March," Fitch analysts Julia Tung and Henry Engelken said in their report.

Serious delinquencies in the 2002 vintage remain low compared to prior vintages at the same point in loan seasoning. This probably reflects improved credit quality among the borrowers in this latter vintage, the analysts said.

In the first quarter, serious delinquencies - which includes loans 60 days or more past due as well as loans in foreclosure, bankruptcy, or REO status - increased for both traditional home equity loans and high loan-to-value ratio loans, according to the Moody's home equity index composite. But the analysts said different reasons account for the rise in each sector.

"Issuance of transactions backed by high LTV and home improvement loans remains low, which serves to increase the weighted average seasoning of the subindex and shift overall performance to a point in the seasoning curve where delinquencies and charge-offs are higher," Moody's said.

Securities issued in 2002 accounted for 36% of the outstanding balance of the composite index, Moody's said.

However, the slower issuance of securities backed by high LTV loans means that the delinquency rate on existing pools of high LTV loans may rise, Moody's said, as the average age increases and the outstanding loans reach their peak period of delinquency risk.

In addition, strong home price appreciation helped borrowers refinance these loans. But as rates rise and prepayments fall off, that could portend higher delinquencies among borrowers who no longer have the ability to refinance easily.

The Moody's Home Equity Index Composite consists of securities backed by high LTV loans, subprime loans and traditional home equity loans.

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