Declining home prices weakened the performance of U.S. subprime residential mortgage-backed securities collateral over the past three years, Fitch Ratings said.
Fitch said changes in the remaining collateral backing the securities and an environment of falling home prices are weighing on the loans’ overall performance.
The ratings giant said recent vintages of RMBS are still showing modest performance improvement, while loans originated before 2005 are either showing little to no improvement over the previous year.
The ratio of pre-2005 loans leaving the RMBS pools voluntarily is higher than those leaving in the 2005 to 2007 vintages, creating a situation where riskier loans are left lingering while safer bets have evaporated from the pool.
Fitch added that “a growing percentage of the remaining performing borrowers have missed payments in the recent past.”
Cash flow also remains a problem with there being fewer servicer advances on delinquent loans, creating cash flow interruptions and timeline changes on loan losses.
Fitch further stated that “the high volume of recent servicer transfers and acquisitions has created further potential volatility. In addition, an increase in interest rate modifications has resulted in less overall cash flowing to the trusts.”
Cash flow volatility also is caused by high mark-to-market loan-to-value ratios and extended foreclosure timelines, as well as low average loan balances.
Fitch also worries recent servicer transfers and loan acquisitions will create more conflict within the market.
“As servicing rights are transferred from one platform to another, trusts are also susceptible to changes in advancing practices and to temporary servicing interruptions,” Fitch Ratings said. “Likewise, the recent consolidation within the industry has made transactions more leveraged to individual institutional practices or operational risks.”
