Slowing residential appreciation combined with rising adjustable-rate mortgage payments will put stress on recent subprime loans, according to a new ratings agency report.
Rising delinquencies have been felt most acutely in the ABX-HE-2006-2 (06-2) and ABX-HE-2007-1 (07-1) CDS indexes, Fitch Ratings announced today.
The New York-based agency said it believes 2006 subprime vintage delinquencies and losses may continue on a relatively high trajectory, "increasing downgrade risk for the lowest-rated investment grade bonds backing the index."
The sensitivity is due to higher exposure to slower appreciation and riskier low documentation loans to subprime borrowers with piggyback second liens, Fitch reported.
Approximately 75 percent of the underlying loans in the 06-2 index and 90 percent of loans in the 07-1 index have experienced less than 5 percent property appreciation subsequent to origination, Senior Credit Policy Director Suzanne Mistretta said in the announcement. In contrast, the ABX-HE-2006-1 index (06-1) had just 26 percent of the loans with less than 5 percent appreciation.
"In particular, lower [home price appreciation] for the 06-2 and 07- indices has increased the risk that overextended borrowers can sell or refinance if they find themselves unable to meet the monthly payment," Fitch said.
Full-documentation loans with no junior liens, which made up around 44 percent of loans from all three indexes, have been performing well, the statement indicated.
But "subprime loans underlying the three indices could face more stress in the future since most of the underlying transactions contain hybrid adjustable rate mortgages that have not yet experienced a rate adjustment," Managing Director Glenn Costello said in the statement.