Rate Resets, Housing Struggles to Put More Strain on U.S. RMBS in 2007

Several years of low long-term rates and rapid home price appreciation have come to an end, and U.S. RMBS will encounter increased challenges next year as a result, according to a new report released today by Fitch Ratings. In its Global Structured Finance Outlook report for 2007, Fitch projects that 2006 vintage subprime mortgages will perform substantially worse in the coming year, with cumulative lifetime losses ultimately reaching 7 percent, the worst collateral losses of any vintage to date. “Borrowers who took on more debt to keep up with home prices are now showing signs of strain as serious delinquencies are up in all RMBS segments,” said Director Grant Bailey. “Increased borrower leverage and slowing home price appreciation will put negative pressure on RMBS, most notably, in the subprime sector.” Serious subprime delinquencies, in fact, have increased almost 50 percent year-over-year while the rate of downgrades has escalated in recent months. “Additionally, subprime RMBS’ increased sensitivity to home price appreciation rates, coupled with a significant number of borrowers facing upward interest rate adjustments, will likely result in more subprime downgrades than upgrades next year,” said Bailey. Though some collateral deterioration is expected in all RMBS segments, the potential drop-off appears to be more marginal in prime jumbo and Alt-A RMBS as the ratio of upgrades to downgrades may decrease but the outlook for both sectors should stay largely positive for 2007. Elsewhere, performance trends for both NIMs and “Scratch and Dent” RMBS will remain negative, while ironically, one of the historically more maligned areas of RMBS, manufactured housing, will be showing continued signs of stabilization next year. For more information, visit http://www.fitchratings.com/.