More Than Half of 2005-2007 US Subprime and Alt-A Mortgages Underwater
Moody’s has issued details of its methodology for its recent increase in loss projections for US subprime and Alt-A residential mortgage backed securities (RMBS) issued between 2005 and 2007.
Moody’s last month revised lifetime loss projections for US subprime RMBS issued between 2005 and 2007. On average, Moody’s now project cumulative losses of 19% of the original balance for 2005 securitizations, 38% for 2006 securitizations, and 48% for 2007 securitizations. For Alt-A Moody’s projects cumulative losses of 14% for 2005 securitizations, 29% for 2006 securitizations and 35% for 2007 securitizations.
A few tidbits from the reports:
As a result of dropping house-prices, over 56% of subprime loans and over 58% of Alt-A loans in Moody’s rated securities are currently under-water.
- After increasing starkly in 2008 (from the mid-40s to the mid-60s), loss severities on subprime pools stabilized in 2009. As of December 31, 2009, severities across all vintages were approximately 70%. We expect severities on subprime pools to rise slightly as we reach the home price trough, but improve thereafter. As a result, we expect lifetime severities to average around 70%.
- After increasing through the first half of 2009, loss severities on Alt-A pools have since stabilized. As of December 31, 2009, the three month averages for 2005, 2006, and 2007 severities were approximately 53%, 59%, and 59%, respectively, an increase, in absolute terms, of 8-13% from a year ago. We expect severities on Alt-A pools to remain largely stable at the higher levels.
- Recent government efforts to curb defaults and foreclosures through loan modification have thus far failed to gain the previously expected traction. The updated loss estimates incorporate approximately 5% for subrime and 2% for Alt-A relative benefit to projected losses across vintages to reflect the limited anticipated success of the program.
For details, see Subprime RMBS Loss Projection Update: February 2010 and Alt-A RMBS Loss Projection Update: February 2010 (Premium)
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