Investors in subprime residential mortgage-backed securities continue to speculate that borrowers who took out loans in 2005 will not stay on top of their mortgage payments as well as those borrowers that did so just one or two years earlier. A number of the conservatively minded buyers say they'd rather invest in later vintage deals, in large part because those mortgages have had more time to benefit from the rapid rate of home price appreciation of recent years. As 2005 vintage loans begin to age, early performance data could back up their claims.

The decision to take extra caution when investing in last year's mortgages is also driven by the specter of deteriorating underwriting standards and lower quality servicing in a more competitive subprime lending environment, according to one chief executive at an investment firm that buys subprime RMBS. "For that vintage, you need to layer your analysis using multiple data points," he said.

While mortgages originated in 2005 have benefited from a higher rate of home price appreciation during their short lives compared with the 2003 and 2004 vintages, they are beginning to show signs of credit deterioration, according to Lehman Brothers. The pace that 2005 mortgage borrowers are falling further into delinquency - or the roll rate - is faster, and the number of borrowers able to pick themselves up out of delinquency status - or the cure rate - is lower, Lehman found. At 11 weeks, the roll rate from the current 30-to-59 days delinquent class is 2% for the 2005 vintage, compared with about 1.6% for the 2003 and 2004 vintages, according to Lehman. At nine months, the cure rate for mortgages 30 to 59 days delinquent is less than 30% for the 2005 vintage, compared with about 35% and 33% for the 2003 and 2004 vintages, respectively.

For example, first lien subprime loans originated in the first six months of 2004 have average loan-to-value ratios of 64% - down from an average 80% when those mortgages were originated. Meanwhile, loans originated in the first and second halves of 2005 have an average 73% and 77% LTV, compared with 81% and 80% upon closing, according to RBS Greenwich Capital.

Within loans originated from 2000 through 2005, subprime interest-only loans and loans backed by condominiums have seen the most rapid decrease in LTV, according to Peter DiMartino, RBS Greenwich's head of ABS and mortgage credit strategy. And, as one would expect, loans backed by homes in California have shown the most rapid declines in LTV by geography, followed by the northeast region. Loans originated in California during the first half of 2005 have already on average experienced a 10% reduction in LTV ratios, from 78% at closing to 68% currently; meanwhile, loans originated to borrowers in the Rust Belt during the same time period have seen only a four percent reduction in LTV, from 84% at origination to 80% currently. More rapid LTV declines among subprime IO mortgages are the result of where those loans are concentrated - California, Florida and other areas in which rapid home price increases have forced borrowers to use the product, according to DiMartino. That same theory stands for condo and investor property loans.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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