U.S. home prices are expected to trough in the next 12 months while default rates on underlying loans in U.K. RMBS will continue to rise, reaching a projected peak in 12 to 18 months time, according to a global survey of RMBS investors.
The Valuation Inputs Consensus survey, which was conducted by Standard & Poor's Fixed Income Risk Management Services(FIRMS) division, tracked the valuation projections of 64 institutions active in the U.S. and European structured finance markets.
The survey has been underway since Q1 2009 in order to monitor investors' input assumptions for the valuation of these key securitization assets.
Investor forecasts for U.S. home prices for the next 12 months are trending upwards, with the projection for average home prices in Los Angeles to increase from -22 percent in Q2 to -13% in Q3; in Miami from -23% to -16% and in Dallas from -9% to -5%. On the whole, investors expect the U.S. real estate market to reach a bottom in the next 12 months.
Mortgage default rates have followed suit, with projected default rates for the underlying loans in US Alt-A and Sub-Prime RMBS improving since the Q209 survey. Expectations for default rates on loans in 2007-vintage RMBS are down to 12% from 30% on Alt-A and to 23% from 30% on Sub-Prime.
In the market for prime fixed rate RMBS, loan default rate projections have increased slightly from 2% in Q2 to just under 4% in Q3 for 2007-vintage deals, while loss severity projections have decreased notably for the same time period.
Average default rate forecasts across an entire vintage for 2004, 2005, 2006, 2007 and 2008 vintages on U.K. non-conforming loan (NCL) RMBS climb from 8.2% for the period covering the next six months to 9.8% for the period covering 12 to 18 months from today.
Default rates on all vintages of U.K. Prime RMBS are also expected to increase, from 1.8% to 2.2% over the same period.
Following these peaks, forecasters do not expect default rates to return to the historically high levels predicted for the next six months on either U.K. prime or NCL RMBS for at least another two and half years.
According to the survey, market participants reached no consensus regarding the timing of the bottom of the market – for each of the next five quarters less than 20% of respondents are predicting the beginning of a recovery.