Subprime-Mortgage Defaults to Surge: Report

Moody’s Investors Service announced Thursday that it’s raising its loss expectations for US subprime residential mortgage-backed securities issued between 2005 and 2007, as it believes, without intervention, nearly all already-delinquent loans will eventually default. The company has therefore placed 7,942 tranches of subprime RMBS with an original balance of $680 billion, on review for possible downgrade. Moody’s attributes the higher loss expectations to “the continued deterioration in home prices, rising loss severities on liquidated loans, persistent elevated default rates, and progressively diminishing prepayment rates throughout the sector.” The updated projections, according to the Moody’s report, will reflect current home price projections and The Homeowner Affordability and Stability Plan announced February 18th. Loss expectations for newly originated loans will increase 10 percent, while loss expectations on other loans could rise 25 percent, said Nicolas Weill, Moody’s team managing director and chief credit officer, according to a Reuters report. Currently, 42 percent of outstanding 2006-vintage subprime loans are at least 60 days delinquent, in foreclosure, or held for sale, Moody’s said, supporting its notion that one-third of borrowers — which represents 19 percent of today’s outstanding loans — could be in default mode by year-end. “Despite anticipating modest recovery in the housing environment in the next few years, Moody’s expects subprime borrowers will find limited refinancing opportunities due to negative equity and lack of available credit,” the report said. Loss severities have also worsened in the last few months, rising to 63 percent, according to the report. Moody’s anticipates loss severities to rise to around 70 percent, based on an expected further decline in home values. And, despite the anticipated recovery in the housing market, “subprime severities are likely to remain elevated over time,” Moody’s said. “Right now we’re experiencing unusual market conditions,” said Richard Cantor, team managing director at Moody’s, during a two-hour conference call on its subprime downgrades. “The number of subprime mortgage securities downgraded has ‘no precedent,’ while the dollar value of these downgrades is less significant.” Write to Kelly Curran at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.