In the first quarter of 2013, rising house prices and relatively low interest rates helped improve the outlook for the riskiest tranches of residential mortgage-backed securities, according to CoreLogic’s bond tracker.
The bond tracker is a RMBS assessment service that monitors more than 30,000 bonds backed by seasoned non-agency Alt-A, subprime, pay-option ARM and jumbo prime loans. The tracker provides a quarterly assessment of their credit quality and outlook.
As a result of housing prices rising, RMBS deals that contain the highest percentages of delinquent and underwater loans are now more likely to perform instead of defaulting, the company said in a press release.
There is even an upside to bonds that must still be liquidated in the current housing market environment. Those deals may now incur lower losses because recoveries are now higher, according to the report.
For example, the report indicates lifetime losses on Subprime and Pay-Option ARMs (POA) were reduced by 823 and 552 basis points, respectively. The average losses in the distressed vintages of 2006 through 2008 also rebounded by at least 400 basis points.
Bonds at the lower end of the credit spectrum showed the most improvement: 5 percent more of the bonds entered the C category, most moving up from the D category. Other categories were relatively stable with prepayments and downgrades reducing the outstanding balance of AAA bonds by only 2 percent.
“Strong home price growth and historically low mortgage rates were key factors in the improvement that we saw in first quarter performance,” said Ben Graboske, senior vice president, real estate and financial services for CoreLogic. “While housing price gains continued in the second quarter, they have been accompanied by interest rate increases that could decrease future benefits for ARM-backed bonds.”