Credit scores in reperforming loan securitizations drifting lower

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The weighted average FICO credit scores of securitized reperforming loans are showing some deterioration, according to a DBRS study of bonds issued since 2015.

"For certain programmatic issuers, WA FICO scores have declined between 15 points and 20 points since program inception," said DBRS analysts Quincy Tang and Justin Becker in a report released Tuesday.

However, 90% or more of the collateral pools studied have remained current, with the serious delinquency rates for deals generally coming in below 6%, according to the report.

"Although RPL securitization history is relatively short, and limited, the performance of rated RPLs has been strong," the analysts said.

Cumulative net losses tend to be no higher than 1%, with the exception of one deal that had an unusually high amount of principal reduction ($20 million). That transaction had an accumulated net loss of 2.5%. Principal reduction generally occurs over three-year periods if the borrower pays on time.

Some loans backing the rated reperforming loan deals studied could see upward adjustments in their interest rates. The constant prepayment rate of the loans generally ranges between 10% and 15%.

Because of U.S. home price appreciation, repeat issuers have relatively stable loan-to-value ratios, but the analysts warned that "to the extent the environment becomes more distressed, some RPL pools may potentially come under pressure."

However, "the rated securitizations are sufficiently credit enhanced to withstand expected losses at various stress levels," according to the analysts.

Reperforming loan deals DBRS has rated since 2015 total more than $31 billion and represent a majority of the securitized product that exists.

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Loss mitigation Credit scores RMBS Delinquencies DBRS