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Subprime Defaults Improve but Market Conditions Raise Loss Severities

""Fitch Ratings"":http://www.fitchratings.com has reviewed all U.S. subprime mortgage securitizations rated by the agency and found little change in expected losses for the bond investors as default risk improved slightly. However, the agency says loss severities have increased due to longer foreclosure timelines and still-declining home prices.

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Fitch's review included 1,246 transactions issued between 1993 and 2008. Within these bonds, the ratings of 8,993 classes were affirmed, while just 1,633 classes were downgraded. Fitch says the majority of classes downgraded previously had a non-investment grade or distressed rating. The agency also withdrew ratings on 42 classes that included interest-only (IO) and prepayment penalty mortgages because of its pre-stated policy on these high-risk loans.

Looking at the collateral pools backing the more than 1,200 subprime deals, Fitch says average expected mortgage losses are 37 percent, essentially the same as when the agency reviewed the subprime sector in 2010.

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Average expected defaults of 48 percent improved modestly due to signs of positive selection among remaining performing borrowers and the improved performance of modified loans, Fitch explained.

The improvement in projected defaults reflects the positive trends in serious delinquency rates, the agency explained, as average serious delinquency rates declined from 47 percent to 42 percent. The lower ratio was evident despite a reduction in the number of loan modifications and a slowdown in the liquidation rates of nonperforming loans, Fitch said.

The decline in delinquency has been driven primarily by an improvement in the rate of performing loans rolling into a delinquency status. Roll-rates from performing status into delinquency have improved roughly 25 percent from a year ago and are down almost 50 percent from the peak in early 2009.

Expected loss severities, however, worsened to 76 percent. Fitch said this is primarily because the average time to liquidate a distressed loan has increased by roughly six months from a year ago and now exceeds 20 months.

Timelines are expected to increase further in 2011 as foreclosures continue to face procedural challenges.

Additionally, after showing positive trends through much of 2009 and early 2010, home prices began to decline again in the second half of 2010 putting further pressure on loss severities. Fitch expects home prices to decline nationally close to 10 percent over the next two years.

While reduced servicer advancing on delinquent loans and an increase in foreclosure-alternatives such as short-sales should help offset negative pressure on severities, Fitch expects severities to rise 5-10 percent before showing sustainable signs of improvement.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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