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Alt-A Borrowers Looking More Like Subprime Than Prime

by: Research Recap posted on: June 02, 2008

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Further signs of the vulnerability of the “not quite prime” mortgage sector emerges in Fitch Ratings’ decision to revise its ratings methodogy for mortgage securities backed by Alt-A mortgages. Indeed Fitch suggests Alt-A borrowers are starting to look more subprime than prime.

Pools characterized as Alt-A credit quality generally have credit attributes that are
slightly more risky than prime but more sound than subprime.

Fitch said that “with serious delinquency levels for recently originated U.S. Alt-A RMBS transactions rising rapidly in recent months, it has revised its rating methodology for the troubled asset class, replacing its pipeline default analysis with a more forward-looking analytical process to better align loss expectations with collateral risk and market conditions.

Recent vintage performance trends indicate a growing number of borrowers whose profile is weaker than that of a traditional Alt-A borrower and more closely resembles that of subprime than prime.

”Average 60+ day delinquencies on 2006 fixed-rate mortgage [FRM] loans have reached 7.7% for Fitch-rated Alt-A deals (versus 10.2% for the market as a whole), while 60+ day late-pays on adjustable-rate mortgages [ARMs] for Fitch-rated transactions stand at 11.2% (compared to the whole market rate of 16.8%)," Fitch said.

While it should be noted that these delinquencies are much lower than those for subprime mortgages (2006 60+ day of 31% for Fitch-rated pools), they are substantially higher than historical Alt-A levels, which for Fitch-rated transactions averaged around 1%−2%.

Through ResiLogic, Fitch’s residential mortgage loss model, Fitch developed two scenarios for reviewing its rated Alt-A portfolio: a ‘moderate stress’ and ‘high stress’ scenario. ‘The moderate stress credit enhancement levels will be used for taking rating actions in the current review of the Alt-A RMBS issued from 2005 to 2007, while the high stress credit enhancement levels will be used for placing or keeping bonds on Rating Watch Negative,’ saccording to Senior Director Grant Bailey.

For the 2005-2007 vintages, the average moderate stress base-case loss as a percentage of original balance used to determine downgrade thresholds is as follows:

Fixed-rate pools –2005 vintage: 0.9%; –2006 vintage: 2.4%; –2007 vintage: 2.6%.

Hybrid adjustable-rate pools –2005 vintage: 1.7% –2006 vintage: 2.8% –2007 vintage: 2.9%

The average high stress base-case loss used to determine rating watch thresholds is as follows:

Fixed-rate pools –2005 vintage: 1.8%; –2006 vintage: 4.6%; –2007 vintage: 5.1%.

Hybrid adjustable-rate pools –2005 vintage: 3.3%; –2006 vintage: 5.5%; –2007 vintage: 5.8%.

Calculated Risk quotes Fitch’s Grant Bailey as saying “I don’t know if it’s going to be a majority or not but I think a large number of the [Alt-A] senior classes are facing downgrade pressure.” (via FT Alphaville.)

Full details of Fitch’s new methodogy is available in U.S. RMBS Alt-A Surveillance Criteria For Recent Vintages.

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