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| A report released by the International Monetary Fund today analyzes problems in the U.S. subprime mortgage market, who is at risk and the impact to the rest of the world.
Outstanding U.S. residential mortgage-backed securities totaled $5.8 trillion as of January, according to the April 2007 Global Financial Stability Report released today. Including mortgage loans that are not securitized, total mortgage debt is estimated at more than $13 trillion. The country’s RMBS reportedly represents one of the world’s largest fixed-income pools. About $850 billion of America’s RMBS are owned outside America, the IMF said. Subprime RMBS accounted for 14 percent of total mortgage bonds, while the Alt-A share was 12 percent and non-agency prime was 9 percent. The United States is one of the few markets with such a high subprime share, the report indicated. Falling home sales and rising inventories cooled the U.S. housing market last year and helped push subprime delinquency higher, the fund said. Many market participants expect subprime delinquency to eventually exceed previous peaks — more than 8 percent in 2000. And delinquency is now spreading to Alt-A originations — where potentially weaker underwriting could be lurking. “This deterioration reflects a combination of regional economic factors and a shift in the structure of the U.S. mortgage market over the last few years.,” the report said. “Specifically, the weaker mortgage collateral has partly been associated with adverse trends in employment and income in specific U.S. states rather than with particularly rapidly rising housing markets. “In addition, a prolonged period of high home price appreciation coincided with a relaxation in underwriting standards, resulting in a rise in the proportions of less creditworthy borrowers, more highly leveraged loans, and more risky mortgage structures.” A graphic illustration showed loans with combined loan-to-values in excess of 90 percent have grown from around 5 percent of all mortgages in 2001 to around 15 percent last year. Limited documentation loans have risen from around 8 percent to nearly 20 percent, while interest-only and option adjustable-rate mortgages have soared to more than 25 percent from around 5 percent. As much as $1.5 trillion in ARM resets are estimated for this year. A disproportionate share of resetting ARMs are subprime and especially exposed to payment shock, the fund reported. Faced without enough equity to refinance, this group is expected to only increase overall subprime defaults. Making things worse, tighter regulatory guidance and market adjustments will reduce further the financing options for subprime borrowers, according to the study. Since August, credit quality deterioration has pushed spreads on BBB-rated home equity loan RMBS 175 basis points wider, IMF said. But the widening spreads are limited to only certain subprime sectors and is unlikely to pose a systematic threat. “Stress tests conducted by investment banks show that, even under scenarios of nationwide house price declines that are historically unprecedented, most investors with exposure to subprime mortgages through securitized structures will not face losses,” IMF said. Collateralized-debt obligations, which include riskier RMBS tranches, are most exposed to the bulk of pool losses, the report indicated. Mortgage market players at risk include mortgage lenders, which are closing shop or consolidating — albeit at the risk of over concentration; servicers, which are at risk of a dramatic decline in mortgage payments or mortgage insurer failures; and mortgage insurers with subprime exposure, the fund noted. Additionally, banks involved in subprime lending are at risk of declining profitability. Also exposed are overseas investors and hedge funds, IMF suggested. “The complex market structure of mortgage related securities can mask how risks are allocated and the degree to which they are hedged,” the report said — citing the example of widening swap spreads after Ownit Mortgage solutions announced its bankruptcy in December. About the author : Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com. e-mail: mtgsam@aol.com |
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