As the subprime RMBS market continues to face uncertainty, prime loans might be hit next - not surprising given the loose underwriting standards that characterize all of the 2006 vintage. These expectations come amid 2006 vintage resets and increasing concern over Alt-A collateral.
Prime contagion is exactly what is happening, according to market participants. While not overly concerned, observers cite the recent announcements of losses at the higher credit level as well as rising delinquencies among prime loans as indicators of some trouble on the horizon.
Problems in the prime sector arise from loans made to less-creditworthy borrowers, with FICO scores being the primary variable, market sources said. "The problems that you are having in prime are that a lot of the loans that wound up in these deals pushed the boundaries as to what prime is," a mortgage analyst said. "They may have a 760 FICO score but with a tail down to 500, which skews the performance."
Indeed, there have been documentation discrepancies in prime, with originators taking the highest of the three credit scores from the three main credit scoring agencies, Fair Isaac Corp. being one. "It is not so much that the FICO is not predictive - but is the FICO that I am getting the true representation of the person's credit?" the mortgage analyst said.
Delinquencies are obviously on the rise. American Home Mortgage Investment Corp., a prime and near-prime lender, recently announced losses in the value of its portfolio of home loans and loan-backed bonds, causing significant margin calls to its credit facilities. The New York Stock Exchange halted trading in the company's stock last Monday, after the company delayed payment of its 70 cents per share quarterly cash dividend and told lenders it would not be able to grant their refund requests. The company also said it anticipates delaying payment of its quarterly cash dividends on its Series A Cumulative Redeemable Preferred Stock and Series B Cumulative Redeemable Preferred Stock "in order to preserve liquidity." American Home Mortgage did not return calls requesting further information on the type of prime and near-prime loans hit by the company's markdowns.
Countrywide Financial also played a part in recent negative headlines on prime loans. The company announced losses in its prime portfolio of home equity loans, including prime HELOCs and prime closed-end, fixed-rate second liens, many of which were piggyback loans. High CLTV piggyback loans coupled with the lower FICO prime borrowers resulted in weaker performance, sources said.
Payments that were at least 30 days late at the end of the second quarter occurred on 4.56% of the prime mortgage loans owned and serviced by Countrywide, up from 1.77% at the end of last year's second quarter. The losses in prime collateral seem to be a drop in the bucket compared with the delinquent payments Countrywide experienced on 23.71% of its subprime loans. However, most of Countrywide's troubles resulted from write-downs and losses in its prime portfolio rather than its subprime collateral, a bank analyst said.
But despite the negative press, there has been virtually no reduction in mortgage financings in the prime mortgage market, the way there has been in subprime, according to a report from Barclays Capital.
A Jumbo Issue?
The number of jumbo delinquencies remains under control as a result of continued strong performance. However, slower home price appreciation and higher interest rates - which can restrict refinancing opportunities for troubled borrowers - have certainly presented some hurdles for the market, according to a report from Moody's Investors Service.
A report issued last month from Standard & Poor's also noted the increase of simultaneous seconds, or piggyback loans, in prime jumbo-rated transactions. The number of these loans has increased every year for the past six years, amounting to 33% of total prime jumbo-rated transactions in the first quarter of this year and representing roughly 30% in a typical prime jumbo pool, S&P said. The agency noted that while simultaneous seconds, as well as other layered characteristics such as higher CLTVs, have increased, the impact is not as dramatic as it has been in the subprime market.
Prime jumbo mortgage delinquency rates rose during the first quarter, rounding off the third straight quarter they have climbed, Moody's said. Moody's Jumbo Mortgage 60+ Day Delinquency Rate Index came in at 0.37% for the first quarter, compared with 0.289% in the first quarter of 2006. Not a surprise, a main factor in the index's deterioration is the performance of the 2006 ARM vintage, Moody's said.
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