Subprime issuances that were securitized more than five years ago are seeing an increase in negative-equity loans and a decline in performance — leading at least one ratings agency to issue a warning.
Loan performance on subprime residential mortgage-backed securities issued before 2005 has recently deteriorated, Moody’s Investors Service said today. While most of such loans have been paid off, the remaining mortgages are being pressured by a sharp decline in home values.
Delinquency on pre-2005 subprime RMBS rose to 10 percent this past year from 7 percent the prior year. With unemployment still rising and home values expected to decline another 5 to 7 percent — the share of these loans with negative equity will increase.
“Over the coming months, we expect continued negative performance from seasoned subprime pools, as the overhang of impending foreclosures will impact home prices negatively,” Moody’s said.
As a result, 3,890 subprime transactions for $50 billion were placed on review for possible downgrade. All of the impacted RMBS were issued prior to 2005.
The warnings affect around 80 percent of all pre-2005 subprime issuances — suggesting that the total outstanding subprime RMBS for those vintages is around $64 billion.
