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Alt-A Performance Rapidly Deteriorating

S&P report analyzes biggest and worst performing issuers in 2006

December 20, 2007


A new ratings agency report indicates the performance of Alternative-A loans backing recently issued residential mortgage-backed securities is "deteriorating rapidly." The study analyzed the best and worst performance by issuer.

The report, The Spotlight's On U.S. Alt-A RMBS Issuers As Performance Deteriorates Rapidly, from Standard & Poor's Ratings Services, indicated the agency will adjust credit enhancement levels based on the underwriting strength, risk management, quality control and other due-diligence function of the issuer. The move was in response to the recent dererioration in the performance of Alt-A backed deals -- especially those issued in 2006 and 2007.

Alt-A loans generally conform to traditional prime credit guidelines, S&P explained. They diverge from prime loans in the areas of loan-to-value, documentation, occupancy and property types. The credit risk of Alt-A securitizations can vary greatly due to a diverse mix of borrower profiles and product types.

In 2005, underwriting guidelines became less prudent, "a trend that gained momentum in 2006," the New York-based agency said. Investors became more accepting of layered risks which, when combined with declining home price appreciation, led to the current deterioration in performance.

On the higher end of the spectrum, Alt-A mortgages with high credit scores and few layers of risk perform much like prime jumbo loans, according to the report. But the lower end, consisting of loans with low credit scores and many layers of risk, perform more like subprime mortgages.

"In many cases, competitive advantages that issuers possess in underwriting, quality control, or risk management can serve as a key point of differentiation among the best and worst performers," S&P stated.

During recent months, loans delinquent 90 days or more have been rising, with severe delinquency on 2006 vintage as much as four times higher than loans from the 2004 vintage.

"What's more, the negative performance trend doesn't seem to be abating for the 2007 vintage," the report said. "While it's too soon to draw a conclusion regarding the ultimate 2007-vintage performance, early loan seasoning suggests that the deteriorating trend may lead to the worst-ever loss performance within the Alt-A market."

Despite a serious delinquency rate near 6 percent for the 2006 Alt-A vintage, about 90 percent of all Alt-A borrowers are current and actual cumulative losses to date remain relatively low, S&P said.

Countrywide was ranked as the biggest Alt-A issuer in 2006, with $61.0 billion rated by S&P. Next was Bear Stearns with $46.7 billion; followed by Lehman Brothers, with $40.9 billion; and IndyMac, with $28.9 billion. RFC had $27.1 rated by S&P, while RBS Greenwich had $24.8 billion and Goldman Sachs had $21.7 billion.

Rounding out the top 10 issuers were Washington Mutual, with $19.2 billion in 2006 Alt-A securitizations rated by the agency; Deutsche Bank, at $14.2 billion; and Bank of America, with $11.4 billion.

S&P said the top 20 issuers of last year's deals it rated accounted for 95 percent of the total Alt-A market.

Looking at severe delinquency by issuer in 2006, Nomura had the highest level at 9.83 percent, according to the report. Nomura's average FICO score was 694 while its average combined LTV was 94.9 percent. Impac, which had been primarily an Alt-A originator, had the second highest level of loans past due 90 days or more at 8.31 percent. Next was Bear Stearns with a 7.13 percent rate, followed by Morgan Stanley's 6.95 percent level and Deutsche Bank's 6.32 percent rate.

Citigroup, the 18th largest issuer last year, had the lowest severe delinquency rate, at 2.27 percent, the data indicated. Citigroup's average FICO score was 697 and its average CLTV was 92.9 percent. Other issuers with a rate lower than 3 percent included American Home, Bank of America, First Horizon, UBS Warburg and Washington Mutual.

While fixed-rate loans securitized last year had average delinquency of 3.47 percent, average delinquency on hybrid adjustable-rate mortgages was 6.26 percent, the study said.

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: [email protected]

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