Private investors in residential mortgage-backed securities (RMBS) comprised of jumbo mortgage loans are dealing with a greater risk of strategic defaults, according to ""Moody's Investors Service"":http://www.moodys.com.
[IMAGE] The company's analysts base this assumption on the fact that jumbo RMBS have large populations of current borrowers with high loan-to-value (LTV) ratios.
Moody's took a closer look at outstanding mortgage loans backing 2005-2008 vintage transactions across the subprime and jumbo sectors. Analysts stratified the loans based on their delinquency status, and for current loans, their LTV, in order to gauge the extent to which loans that are now current may eventually default.
Although it has by far the fewest delinquencies among outstanding loans, the jumbo sector has the potential for the highest volatility in losses going forward, Moody's concluded.
""This is because it features a high number of current borrowers that are underwater on their mortgages and are[COLUMN_BREAK]
more susceptible to default if the housing market does not turn around,"" the agency explained.
According to Moody's the subprime sector faces the lowest potential for future performance deterioration because more of its weaker borrowers are already delinquent or have defaulted, leaving less room for losses to increase substantially.
The company's RMBS data show that defaults among always-current subprime borrowers have declined substantially since the beginning of 2010, indicating that the remaining borrowers are getting progressively stronger.
The jumbo sector, on the other hand, still faces the potential for a large increase in defaults. Unlike in the subprime sector, the stronger borrowers are the ones that have already left the jumbo pools rather than the ones that remain, Moody's explained.
Over 80 percent of jumbo loans are still current, but more than half of those borrowers are underwater on their mortgages and that proportion has risen significantly over the past few years, according to Moody's report.
Since home prices have been fairly stable in 2011, Moody's says the increasing proportion of underwater jumbo borrowers likely reflects the ability of the stronger borrowers to refinance and exit the mortgage pools.
Moody's notes that default rates among always-current borrowers have not come down in the jumbo sector as much as in the subprime sector, meaning the pool of current borrowers has not strengthened as much over time.