Fitch Ratings expects the recent rate of improvement in U.S. residential mortgage bonds will moderate over the next year as home price appreciation slows.
Rising home prices tend to reduce late payments and mortgage defaults, because the more equity borrowers have in a property the easier it is to sell or refinance to lower their monthly payments. And Fitch has observed that the regions of the U.S. with the largest price gains have experienced greater improvements in borrower delinquencies and prepayment rates, as well as liquidation timelines and loss severities on liquidated properties. Conversely, in regions that have experienced little to no price increases, performance has improved only marginally.
In aggregate, national roll rates improved by approximately 28% between 2011 and 2013, but regions with larger price increases saw greater improvement in borrowers’ loan to value ratios and, as a result, greater improvement in new delinquency rates. Regions with little to no home price gains saw only modest improvement in roll rates, while regions in the 40% home price increase group saw roll rates improve by nearly 50%.
However Fitch projects that the pace of recent home price gains in several regions is not fully supported by the underlying economic fundamentals and will begin to slow, or even reverse. As prices begin to level off, so too will the related improvements in loan performance.
Fitch cited San Francisco, Los Angeles and San Diego as some of the most notable examples where home price gains could be reversed; Phoenix. It identified Miami and Riverside as markets where home prices have grown above 25% since 2011, but are “at or near their sustainable levels.”
There are also regions that Fitch views as remaining undervalued despite experiencing large recent price gains. Notabley, Atlanta and Detroit have seen prices rise 26% and 35%, respectively, since 2011. However, prices in these cities have still not reached long-term sustainable levels following the severe declines starting in 2006. Prices and loan performance in these regions are likely to continue to improve, although the pace may slow.