25th June, 2012:
A recent Standard & Poor's Report points out that some stabilising trends can be seen within housing in the U.S. which will have an impact on the RMBS credit quality.
In S&P's view, home prices and residential mortgage delinquencies generally seem to be stabilising. The report focuses on three crucial factors that broadly affect the key housing market trends and the performance of U.S. RMBS issued before 2008 viz. collateral performance, effectiveness of structural protections and transaction party behaviour. Each of these factors is an important aspect of the surveillance analysis of the RMBS transactions rated by the rating agency.
Highlights of the report:
The RMBS collateral performance snapshot: roll rates have slowed, but cure rates remain low in the recent past – if the trend continues, fewer mortgage defaults would take place in the future. But the overall cure rate remains delinquent as many borrowers may not qualify for the mortgage modifications proposed by banks and the Government sponsored entities. It is also anticipated that borrowers that are currently paying on their mortgages may become delinquent at some point in future if they have little or no equity in their homes or if they become jobless. Loan modifications help reduce re-default rates, but they aren't a cure at all. Some of the rise in principal modifications is attributed to various government modification programs. But then modification alone cannot resolve performance issues in private label mortgage pools. While the trends have been positive, the re-default rates for all mortgage products remain high.
The effectiveness of structural Protection
Monitoring the timing of losses in the liquidation cycle is essential as foreclosure/liquidation timelines and the level of prepayments can influence eventual losses. Whereas extended foreclosure timelines generally delay losses in RMBS structures. The impact of foreclosure timelines largely depend the deal structures.
Historically there is a strong correlation between prepayments and interest rates. In recent years, prepayment has declined despite low interest rates particularly among Alt-A borrowers.
Some transactions that had been performing generally well experience adverse rating changes when one or more loans becomes delinquent and are liquidated. This is known as tail risk. Tail risk is an important consideration for rating as loan counts in transactions decline.
Last but not least, the effect of transaction party behaviour
Servicers play an important role in addition to collecting the payment, actually helping the modification payment. The idea of Servicer Advancing is an interesting trend being talked about in the report; it is basically when the servicer expects to get repaid and on that basis advances some money to the trust for repayment to the bond holders against those delinquent loans. Since 2008, servicer advancing has declined.
[Reported by: Abhijit Nagee]