A dramatic spike in loan delinquencies across Louisiana is a worrisome trend for investors in subprime RMBS, according to analysts at Credit Suisse.
"Even modest concentration in Louisiana should present a concern to subordinate investors," the firm's analysts said in a report.
Others also reported unexpectedly high delinquencies in areas hit by hurricanes Katrina and Rita last year. But they seemed mostly unfazed by the potential impact on outstanding deals, saying investors still appear to be well insulated.
"Even though the numbers look very dramatic for the loans in the disaster areas, on a pool basis they are not as dramatic," said Grant Bailey, a director at Fitch Ratings who tracks RMBS performance.
Credit Suisse cautioned investors that not only are delinquencies up significantly, but mortgage performance is on a deteriorating path following the hurricanes. By the end of November, 42% of subprime loans in Louisiana were in 30-plus days delinquency. New Orleans was even worse, with 63% of subprime loans in 30-plus days delinquency (including foreclosure, bankruptcy and REO).
The rates of rolling into more serious delinquency are much higher than before, the Credit Suisse report said. At the state level, more than 68% of November's 30-59 days delinquent loans became 60-89 days delinquent the following month. That is up from a pre-hurricane average of 22%.
Of November's 60-89 days delinquent loans, more than 71% slid into 90-plus days delinquency in December. That is also much higher than the previous average of 26%.
"Consequently, the rate of curing from the current delinquency is lower than pre-hurricane levels," the Credit Suisse analysts wrote. "This indicates that late-stage delinquencies will likely continue to increase, and borrowers' delinquencies show few signs of improving even a full three months after the two hurricanes."
Credit Suisse calculates that the outstanding balance of Louisiana subprime loans is about 0.7% of the total subprime market.
However, the analysts wrote, "the recent surge in delinquencies could affect the performance of deals with a high concentration of Louisiana loans."
Credit Suisse found 161 subprime deals with a 2% or greater concentration in Louisiana. Of those, 130 came from a vintage of 2002 or earlier, and they had an even higher average Louisiana concentration of about 3% due to historic slow prepayment in the region.
The report urged subordinate investors to closely watch performance on those concentrated deals.
"Based on recent performance, it may be reasonable to assume that about 40% of the current Louisiana loans will ultimately go into default and the severity of those loans may reach 80% on average [given low balance and some likelihood of total loss]," the analysts wrote.
That assumption would result in about a 1% loss, on average, for the high concentration Louisiana pools - enough that investors in subordinate bonds should pay close attention in the coming months, they said.
Beyond the disaster zone
Other analysts saw similar loan trends, but reacted with less concern.
The economic ripple effect of hurricanes Katrina and Rita is rolling through Louisiana and Mississippi, said Michael Youngblood of Friedman Billings Ramsey.
The negative impact outside the immediate disaster areas is surprisingly significant, Youngblood said, adding that the impact on mortgage borrowers throughout those states started to become apparent in November.
"Prosperity in the South runs from the coast inland," he said. "The negative impact of the two hurricanes has been transmitted with almost a textbook lag of a few months from the coastal cities to the inland cities, and the ... states are suffering economically."
Youngblood believes insurance will protect investors from losses in the major disaster areas.
"However, that does no good if one is talking about the inland cities, where the loss of employment will not be offset by grants or loans," he said.
Youngblood is not ringing the alarm bell yet. He pointed out that the impacted areas represent a relatively small portion of the market - less than 3.5% of all prime, Alt A and subprime loans. He expects the impact on the subprime sector to be disproportionately greater. He also expects some impact to be felt in the auto and credit card sectors along with the mortgage sector, but not such an impact that he is worried about particular securitized deals taking a hit at this point, he said.
Fitch still comfortable
Bailey said seriously delinquent loans are spiking particularly high in the ZIP codes hardest hit by the two hurricanes, which includes parts of Louisiana, Alabama and Mississippi.
"Close to 50 percent of borrowers in these areas are delinquent," Bailey said.
Fitch monitors roughly 200 subprime deals with greater than 2% concentration of loans from the affected ZIP codes. The deals total about $25 billion, or about 5% of all subprime RMBS with Fitch ratings.
Within those deals, delinquencies on loans from the designated disaster areas have tripled and losses are likely to result, Bailey said.
"It would not be unreasonable to see losses as high as 20% to 25% of borrowers in these areas," he said.
However, the deals appear to be well insulated from the impact. Seriously delinquent loans increased marginally for the deals overall - not more than a few percentage points.
Bailey said even if loan losses of 25% occur in the disaster areas, that would translate into a drop of about 50 to 100 basis points of the remaining pool balances.
"For most transactions, that is absorbable," Bailey said.
Because many of the deals are very seasoned, the ratings already reflect expected losses on the remaining pool balance of 10% or higher.
An additional 50 basis points of loss would add pressure, but would not be catastrophic, Bailey said.
Fitch is more concerned about recent vintages, where the expected loss is lower and 50 basis points would have a relatively greater impact, he added.
The number of recent deals with loan concentration of more than 2% in the disaster areas is relatively small: a few dozen from 2003 and about a dozen more from 2004 and 2005. Bailey said Fitch will monitor those closely for the next few months.
He does not expect the hit from the hurricanes to result in any rating actions, at least not directly. The only deals that might get into trouble are those that are already struggling for other reasons.
"It could push underperforming deals over the edge," he said.
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