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Wave of I.O. Recasts Ahead

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Over $100 billion in prime and nonprime interest-only loans are scheduled for a payment recast during the next two years, and delinquency is expected to more than double on those loans.

More than $47 billion in prime and Alt-A residential mortgage-backed securities are due to recast from an interest-only payment to a fully amortizing payment during the next 12 months, Fitch Ratings reported today.

Looking at the next 24 months, $80 billion in prime and Alt-A loans a scheduled to recast. In addition, $50 billion in subprime mortgages are set to recast.

Average payment increases are estimated by Fitch to be 15 percent “and possibly higher if interest rates increase” given that more than 90 percent of interest-only mortgages are adjustable-rate.

Recasts typically have a significant impact on loan performance, according to the news release.

Fitch noted that 60-day delinquency soared 250 percent in the 12 months following previous recasts on prime and Alt-A loans. On just prime loans, pre-recast delinquency climbed from 3.3 percent to 9.3 percent after the balance was amortized. Delinquency rose from 12 percent to 29 percent on Alt-A loans and from 20 percent to 58 percent for subprime mortgages.

The ratings agency warned that pools with high concentrations of interest-only loans could be downgraded — though these loans account for just 8 percent of securitized non-agency loans.

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