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Subprime Market Correction

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Subprime Market Correction

S&P releases RMBS report

March 5, 2007

By SAM GARCIA

Issuance of subprime mortgage-backed securities was down last quarter and is headed lower, according to a new report from a major ratings analyst. Meanwhile, some evidence exists that underwriting standards have been tightened.

“The appetite for U.S. subprime loans from the secondary market has exceeded demand in recent quarters, encouraging an erosion in underwriting standards,” Standard and Poor’s Rating Services said in its report U.S. Subprime Market Continues Correction As Issuers Strengthen Underwriting Standards released today.

Seeking evidence that underwriting standards are now being tightened, S&P said that while some documentation improvements have occurred — “other results remain mixed.”

“Affordability products within the subprime market continue to evolve as longer-term loans remain popular,” said George Kimmel, an RMBS group director, in the statement.

The increase in longer-term products came at the expense of traditional amortizing 30-year loans, the report said.

FICO scores reportedly remained mostly unchanged from the third to the fourth quarter, according to S&P. Loans with alternative and stated income documentation declined — with a pickup noted in loans with 12 to 23 months of documentation. FICOs for refinance and cashout transactions were marginally higher than a year earlier while purchase transaction FICOs were flat.

The New York-based agency, which said it rated $99.0 billion in subprime RMBS during the fourth quarter, reported $420.6 billion in total 2006 subprime issuance, down 7 percent from the prior year.

“The decline is expected to continue as the subprime industry goes through a period of consolidation while it strives to toughen underwriting standards,” Kimmel added.

The average subprime mortgage balance was a record $191,090 during the fourth quarter, $5,000 higher than the prior period, S&P said. Meanwhile, the average FICO score on subprime loans was 628 in the latest quarter, 20 points higher than five years earlier, and the weighted average loan-to-value was 82 percent — the highest in six years.

Subprime issuers of fixed-rate mortgages during the fourth quarter with the lowest weighted average FICOs were CWABS Inc. at 601.41, Delta Funding Corp. at 611.88, and Equity One Inc. with 613.82, according to S&P. Adjustable-rate mortgage issuers with the lowest FICOs were Delta with 585.91, Bear Stearns & Co. with 586.82 and Equity One with 597.08.

The report also analyzed transactions involving simultaneous first and second mortgage closings.

“Piggyback borrowers have higher FICO scores on average than do non-piggyback borrowers to compensate for the increased risk inherent in obtaining piggybacks, such as increasing the CLTV and possibly the total debt burden to the borrower,” the report said. “This also explains the lower [weighted average coupons] observed for piggybacks.”

The use of second liens reached an all-time high of 31 percent during the fourth quarter, but S&P said the latest figures reflect a slight decline.

Nearly 45 percent of piggyback transactions were in California and Florida, the report indicated. Texas, Illinois and New York were also among the top five states with simultaneous first and second mortgage issuance.

“Borrower credit quality on second liens as measured by FICO has also increased in the last four years; second-lien FICOs now stand at 649 on average, up from 622 in 2002,” S&P reported. “Though this may reflect more stringent underwriting, as with all FICO analysis in the current environment, the recent low-interest-rate and mortgage-rate environments have been conducive to improved borrower performance, and thus higher FICO scores.”


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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