Recent data show the United States residential mortgage default outlook is strong in the context of the global securitized market.
The United States, according to a recent Fitch report, “is finally expected to turn the corner in 2013.”
The report finds recent prime U.S. originations—as well as originations in Germany, Belgium, France, the Netherlands, the United Kingdom and Australia—have the lowest lifetime default probability expectations, ranging from 2% to 6%.
The U.S. lifetime default probability is the lowest at 2.3%, followed by Australia at 3% and Belgium at 3.2%.
Fitch stresses, however, that in the United States “legacy portfolios still suffer from weak performance,” and it is the “post peak” mortgages that have “very strong attributes…significantly above pre-crisis averages.”
In contrast to the United States, default expectations for Italian, Portuguese or prime Spanish pools range from roughly 9% to 11% “despite relatively stable performance history.”
Percentages for Greece and Ireland go even higher, nearing 20%.
Fitch notes that these markets have high unemployment, economic uncertainty and lower sovereign issuer default ratings that are in the low-end investment grade or high-end speculative grade range, as opposed to the highest investment grade rating of AAA that the United States so far has managed to maintain.
“Mortgage performance depends on sovereign creditworthiness,” the report notes.
Interestingly, Fitch also finds that while there is indeed a continuing concern about foreclosure backlogs in the United States—particularly in regions with judicial foreclosure processes—it could be far worse.
While the expected time that passes between default and recovery in the United States averages about 18 months in a base case scenario, and in some countries like Australia and the Netherlands it is only 15 months, the equivalent recovery timing in a country like Italy is much slower at 74 months.
“The Italian enforcement procedures are the lengthiest, due to a fragmented legal system,” the report finds.
Other regions that make the United States foreclosure process look relatively speedy by comparison include Portugal, where “given the complex legislative framework, coupled with courts being under-resourced, the period between requesting repossession and the sale averages three to five years.”
Base case expected default-to-recovery timelines in countries like Greece and Ireland are slightly better than in Italy and Portugal at 48 months and 50 months, respectively; but these are all still far longer than those in the United States.
“Repossessions in Ireland and Greece are also very slow and substantially complicated by various legal, regulatory and political hurdles,” noted the report.
“In both countries it is effectively impossible for banks to foreclose for considerable parts of their portfolios.”
Fitch finds “policy risk increasingly matters” when it comes to the outlook for mortgage performance across the globe.
“Market performance is increasingly influenced by political considerations,” Fitch noted in the report. “This involves limitations on foreclosure and/or debt relief, specifically in Ireland, Greece and most recently Spain.”
While the performance outlook for recent originations sounds relatively favorable for the United States and Fitch observes that U.S. mortgage lending has “shown stabilization,” it also finds that “downside risk” in new lending levels “prevails” in this country.
The report, in line with many other single-family home loan production forecasts for the United States, notes that “while optimism is increasing, growth in purchase volumes” is “not expected to be sufficient to counteract an expected contraction of refinances.
