From prime to Alt-A to subprime, U.S. mortgage borrowers continue to perform historically well and even better than they did a year ago, Friedman Billings Ramsey analysts said last week. But where performance had previously been poor, it remains poor. FBR last month was not able to reduce the number of metropolitan statistical areas where loan performance is, on average, poorer than in other areas, although head of ABS research Michael Youngblood was optimistic.
Using performance statistics for May, FBR analysts found that each state of delinquency, on average, declined on the month from prior year levels. The portion of those loans that are seriously, or more than 90-days, delinquent has shrunk to "striking" levels from last year.
"Indeed, serious delinquency rates of prime, Alt-A and subprime loans remain near the lowest levels of the new century," FBR wrote. As is broadly known, generally improving conditions in the job market and an optimistic unemployment rate have helped maintain the historically low delinquency rates.
But while the analysts found that overall delinquencies are on the decline for now, they were not able to reduce the number of MSAs - 58 in 16 states - experiencing "persistently high" delinquency rates. Portfolio managers should still improve credit performance by reducing exposure to below a 10% concentration of loans within those areas. Most of those delinquencies are in the subprime realm, where the seriously delinquent loans had a 97.8% representation, compared with 90.1% for Alt-A and 84.1% for prime.
"As a human being I'd be delighted for the list of 58 to go to zero, but as an analyst I don't expect that to happen," said FBR's Youngblood. But, he said July's positive job report released the preceding week might be enough to bump some of those MSAs off the list.
Youngblood said that in certain regions, such as areas surrounding the Great Lakes, an irregular revival in traditional mining and factory activities has led to certain improvements in credit performance. Additionally, a number of chronically weak markets have increased slightly.
Prime loans considered seriously delinquent were above the average of 0.15% for May in 13 MSAs. The MSA prime loans in those areas considered so delinquent came as high as 4.3% in Waterloo, Iowa and 4.2% in Glen Falls, N.Y., to 1.5% in Rocky Mount, N.C. and Benton Harbor, Mich., pulling up the rear of the delinquent group at 1.4%.
"The significantly high serious delinquency rates of prime loans in these areas should concern participants in the primary and secondary mortgage markets for obvious reasons that require no elaboration here," FBR wrote.
Serious delinquency rates for Alt-A and subprime borrowers were higher-than-average in 11 MSAs among Alt-A loans and seven MSAs for subprime loans.
While the average portion of Alt-A loans delinquent in May was 0.9%, in Sharon, Pa. 10.3% of Alt-A loans were 60 days or more delinquent, 7.1% delinquent in Goldsboro, N.C., and the lowest above average MSA in the group was Lake Charles, La. at 3.5% delinquent.
Subprime borrowers in Cleveland were performing the worst, where 18.6% were seriously delinquent on their mortgage payments, significantly above the subprime delinquency average in May of 5.4%. Borrowers in Charleston, S.C. were not far behind at 18.4% delinquent, while Daytona Beach, Fla. subprime borrowers were at 16.9% and the Youngstown, Ohio MSA was at 16.5%. All of these MSAs posted lower delinquency rates though, year-over-year. The bottom three in the group - rounding out the total of seven MSAs that were above average - are those that have actually posted gains in subprime delinquencies since last May.
Those include Janesville, Wis., at 13.2% delinquent, up from 10.9% last year; Bloomington, Ind. at 11.5% delinquent, more than double last year's 5.6%; and Eau Claire, Wis. at 10.7%, up from 7.8% last year.
FBR found that serious RMBS delinquency rates, with a 10% or more share of originations in the 58 metropolitan areas, were 1.4 times greater than average, and cumulative loss and loss severity rates were three times and 1.8 times more, respectively. The investment bank warned that losses taken on those securities could occur before the over-collateralization is fully established, exposing subordinated and mezzanine classes to "greater risk of loss than anticipated at issuance."
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