Fitch Ratings is forecasting subprime mortgage delinquencies to rise as much as 10% to 15% in 2006 from current levels. The rating agency late last week released its structured finance outlook report for next year, which did contain positive news for the prime and Alt-A mortgage sectors.
While a sector of subprime borrowers are expected to begin defaulting on their loans as their adjustable-rate mortgage products reset into higher interest rates and subsequently larger payments, prime and alt-A mortgages should "remain stable in 2006, reflecting the strong economy and limited exposure to payment shock given concentrations in fixed and long-term ARM mortgages, Fitch wrote. The rating agency is anticipating that borrowers will continue to refinance their mortgages in 2006, primarily into ARMs with longer fixed periods, fixed-rate mortgages, the ever-popular option ARM and the 40-year mortgage.
Despite the uptick in subprime delinquencies, "high prepayments and strong loss performance to date have allowed bond credit enhancement to build rapidly, and should help protect bonds from the expected decline in loan performance," Fitch wrote.
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