It is unclear whether reforms to the Federal Housing Authority or loan modifications will improve a market in which declining U.S. home prices will lead to increasingly high default rates over the next couple of years, according to Fitch Ratings.
In a conference call on Thursday to discuss its U.S. 2006 subprime rating actions, the agency discussed a grim market in which the 2006 subprime default rates double those of the previous year. Approximately 641 classes of 2006 RMBS loans, or $7.4 billion, are below investment grade with the possibility of defaulting. Additionally, newer vintage loans are actually looking worse than there predecessors.
"It is very disconcerting," said Glenn Costello, Fitch managing director and RMBS co-head. He said the agency has looked into why late 2006 vintages are heading for early defaults and found "some degree of fraud" and lax underwriting might be partly to blame.
Costello also said the 2006 vintage second lien subprime ratings were "very disturbing looking," as 436 classes were downgraded on Aug. 16 with an outstanding balance of $7.4 billion. Of 51 classes from 2006 rated 'AAA', 32 were downgraded.
"Our expectations are for similar [home price] declines to occur over the next couple of years," said Costello. "That really informs opinion that the natural improvement over time [of the mortgage market] is not going to appear."
Costello said it is unclear whether loan modifications will provide significant relief because it is unclear how many borrowers will actually be eligible. The same assessment is applied to the government's FHASecure program. Further Fed cuts, however, could help. "Additional Fed easing could certainly at least mitigate the risk of further steep home price declines, if not necessarily reverse the trend," said Costello. .