Only 5% percent of subprime residential mortgage-backed securities borrowers have been able to refinance into lower interest rates since 2009, compared to 40% of all prime RMBS borrowers, Fitch Ratings said.
The ratings agency said this data suggests low interest rates for the next two years will do little to help subprime mortgage borrowers since they will have to rely mainly on loan modifications for any type of debt relief.
While low interest rates have helped all borrowers by providing some support for home prices, subprime borrowers are stuck in higher rates since most of their initial loan terms had minimum floors on adjustable rates. The average coupon rate on unmodified subprime adjustable-rate mortgages dropped only slightly from 7.8% to 7.6%, according to the research firm.
To make matters worse, many of the borrowers were making interest-only payments and now have much larger payments as they begin to pay down the rest of the debt, Fitch said.
About 50% of subprime loans outstanding had their loan terms modified at least once, with average cuts from 8.24% to 5.03%, Fitch said.
“However, the pace of new rate modifications has slowed as fewer remaining borrowers qualify for existing modification programs or are able to provide the needed documentation,” Fitch explained. “In recent months, the percentage of borrowers receiving rate modifications is roughly 1/3 the pace experienced at the peak in 2010.”
