...Payment Increases on Horizon: Roughly one-half of all performing first-lien mortgages backing private-label U.S. RMBS are exposed to monthly payment increases over the next five years. Payment increases will be caused by changes in interest rates, expiration of interest- only (IO) periods and loan modification (mod) rate resets. Payment Shock Drives Defaults: Default risk rises with the magnitude of a payment increase. Fitch Ratings estimates that loans with the largest future payment increases are roughly 3.0x more likely to default than comparable loans with no payment increase. Ratings Impact Low: Fitch's U.S. RMBS Loan Loss Model projects future payment increases and adjusts default expectations accordingly. As such, ratings on bonds backed by at-risk pools already account for the additional default risk. IOs at Greatest Risk: IO loans face large payment increases as their IO periods come to an end and amortization begins. As a significant number of peak-vintage 10-year IOs approach...
