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Non-Conforming Performance Seriously Bad

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An analysis of loan performance on securitized non-conforming mortgages issued between 2005 and 2008 indicates that non-conforming lending was a colossal failure during those years.

The analysis was performed by Moody’s Investors Service and outlined in 2009 Review and 2010 Outlook: U.S. RMBS Surveillance.

The report indicated that delinquency on jumbo residential mortgage-backed securities issued between 2005 and 2008 shot up to 9.50 percent as of Dec. 31, 2009, from 3.27 percent at the end of 2008, while foreclosures more than tripled to 3.91 percent.

“This sector had been largely resistant to losses until 2008 given the strong credit profiles of jumbo borrowers and the low loan-to-value and combined-LTV ratios generally associated with this sector at loan origination,” the report said.

On alternative-A issuances from the same vintages, more than a quarter of loans were seriously delinquent. Low credit scores, high loan-to-values and stated documentation drove the poor performance in this sector.

Moody’s did note, however, that Alt-A REOs have declined from a 4 percent peak in March 2009 to 3.26 percent as of Dec. 31, 2009. Still, Alt-A losses are projected to increase.

The serious delinquency rate was even worse for payment-option adjustable-rate mortgages during the four-year period: 40 percent. Nearly one-quarter of the delinquent loans are either in foreclosure or REO inventory, while nearly 70 percent are either in California or Florida. Driving the poor performance is the negative-equity factor.

“This performance is particularly disconcerting given the fact that many option-ARM borrowers have yet to see their loans re-cast to fully amortizing payments at current mortgage rates,” the report said.

Moody’s said that almost half of subprime loans backing RMBS issued between 2005 and 2008 are seriously delinquent. The high level of delinquency stands despite signs of stabilization in the subprime mortgage sector late last year as the rate of deterioration declined.

The outlook for non-agency performance is no better.

“Many RMBS rated by Moody’s continue to face downward rating pressures due to continuing weaker-than-expected mortgage credit performance,” the New York-based ratings agency stated. “Elevated delinquency levels and higher loan-loss severities as well as heightened counterparty risks related to both credit and operational risks characterized 2009 private-label mortgage credit performance.

“These will remain as issues in 2010. Downside risks are particularly high.”

The severe levels of serious non-conforming delinquency contrast performance at Freddie Mac — which reported that serious delinquency on the $2.25 trillion in mortgages it manages was 3.87 percent on Dec. 31, 2009.

Still, Freddie’s residential delinquency stands at the highest level on record.

“Continued economic weakness and stresses in the financial markets resulted in more failures of financial institutions with involvement in structured finance and specifically RMBS during the past year,” Moody’s added. “These failures raised a number of new RMBS-related credit issues.”

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