A ratings agency outlook for the private-label market in residential mortgage-backed securities indicates that securitized jumbo mortgages pose the greatest risk of strategic default. In fact, nonprime loans pose less of a risk than jumbo mortgages. The report indicated that the level of re-defaults on modified loans is tapering off.
Non-agency RMBS are expected to face challenges this year.
Strategic defaults pose a “major risk” as housing markets continue to see price declines.
That assessment came Thursday from Moody’s Investors Service in an annual RMBS report.
The biggest risk is with jumbo RMBS; more than half of jumbo borrowers who have been regularly making their payments have a loan-to-value ratio in excess of 100 percent. The share of upside-down jumbo borrowers started significantly rising in late 2010.
On the other side of the coin are securitized subprime mortgages, which have already seen weaker borrowers default — leaving little room for more losses.
The risk on payment-option adjustable-rate mortgages and Alt-A loans falls somewhere between jumbo and subprime borrowers. Of the two categories, option ARMs pose more risk of strategic defaults.
But the New York-based firm also said that the performance of the loan pools backing outstanding RMBS has been stabilizing.
Loan liquidation delays and falling home prices from increased distressed sales are expected to have a minimal impact on RMBS performance because high loss expectations have already been built into the forecast.
Delinquency levels have not increased primarily because of mortgage modifications.
“Moody’s notes that re-default rates on modified loans have been declining, largely because payment reductions in the modifications have gotten larger,” the report said.
The report said that servicers will be reluctant to provide principal forgiveness despite that such a move is a key way to prevent strategic defaults.
Moody’s praised servicers for establishing single points of contact and utilizing more special servicers.
Private-label issuance is expected to be “modest” in 2012 because of regulatory uncertainty as well as Fannie Mae’s and Freddie Mac’s dominance of the market. Issuance will involve “more comprehensive reviews of originators, better quality and more reliable loan level data, and strong mechanisms for enforcing breaches of representations and warranties.”
The deals that do close will also better address legal issues relating to foreclosure challenges.
