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Layered Alt-A Performance Down

Layered Alt-A Performance Down

UBS releases prime, Alt-A report

December 29, 2006


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Alt-A mortgages loaded with more layers of risk that were securitized this year are performing worse than prior vintages performed. But prime fixed rate loans are holding up.

Such was amongst the findings outlined in an update report on non-agency mortgage credit performance by UBS, focusing on prime and Alt-A collateral in the 2006 vintage.

“Non-agency performance worsened considerably in 2006,” UBS said in the report. While “the deterioration in mortgage credit is widespread, and not limited to certain product types,” in the context of a market-wide slide, “lower credit, particularly in the form of risk-layering, is responsible for a disproportionately large share of the deterioration.”

Of $308.1 billion in originations this year, about 34 percent were second mortgages, according to the report. Of the $103.6 billion that had second mortgages, more than half — or over 51 percent — were Alt-A loans, about 31 percent subprime, and only 17 percent were prime.

Prime/Alt-A loans past due 90 days more amount to $365 million, of which about 67% have a second mortgage. Alt-A loans with seconds in this delinquency category amount to $231 million and prime loans with seconds $12 million.

While current prime/Alt-A volume, at $185.5 billion, was much higher than that in delinquency, the share of borrowers with seconds was much smaller at 35% or $66.0 billion.

“Not surprisingly, the delinquent loans in prime/Alt-A have much in common with the delinquent subprime loans,” UBS said, noting that it previously identified risk layering as a key indicator of deteriorating underwriting quality and risk-layered 2006 subprime loans as responsible for a disproportionately larger share of subprime delinquencies.

UBS found that delinquent loans in this year’s prime/Alt-A vintage tend to have lower FICO scores, a higher percentage of low document loans, “much higher” percentage with silent seconds and higher combined loan-to-value as well as higher debt-to-income.

“Generally speaking, 2006 vintage performance is significantly worse than 2003-05 vintages,” except for prime fixed-rate mortgages, but “credit deterioration is more pronounced for Alt-A mortgages” and ARMs, UBS said.

In prime/Alt-A markets, fixed-rate loans have the lowest percentage of silent seconds, the lowest combined LTV, the lowest DTI ratio, and the lowest percentage of stated income loans, according to the report.

“On the other hand, the recent crops of affordability mortgages tend to be loaded with other affordability features like second liens, high CLTV and low doc,” UBS noted. “Most of 40-year Alt-A loans also happen to be option ARMs; and Alt-A ARM IOs have the highest [percentage] with silent seconds and highest CLTV.”

While 2006 delinquency rates rose dramatically over 2005 counterparts at comparable seasoning, the degree of deterioration is much worse for risk-layered products. For fixed-rate Alt-A loans with full doc, the 60+ day delinquency percentage of 2006 vintage was 68% higher than the 2005 vintage, compared to a 168% jump in the same period for fixed rate loans with low doc. For ARM IO Alt-A loans with full doc, the 60+ day delinquency portion of the vintage was 172% higher than the 2005 vintage, compared to a 333% surge for low doc ARM IOs.

A recent report by Dominion Bond Rating Service also highlighted that this year’s vintage “is distinguishing itself as one of the worst performers” — with delinquencies on loans 60 days or more past due being 25 percent higher than last year’s vintage and approximately two-thirds higher than the 2004 and 2003 vintages.

Factors Dominion cited as contributing to the latest vintage’s weaker performance included greater leverage inherent in “affordability products,” the migration of lenders down the credit spectrum, and the fact that more loans in 2006 than in other vintages, were made to first-time home buyers, stated income borrowers, piggyback borrowers who financed 100 percent of their homes and borrowers who obtained 40- to 50-year mortgages for lower monthly payments.

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