Fitch Downgrades Prime Mortgages

Written by: Steve Cook   Thu, October 15, 2009 Beyond Today’s News, Crisis Watch

Rising unemployment and negative home equity are causing an increasing number of mortgage borrowers whose mortgages have been converted to prime residential mortgage-backed securities (RMBS) to fall behind on their monthly payments, according to Fitch Ratings.

In response, Fitch Ratings has taken various rating actions on 649 prime RMBS transactions issued prior to 2005, downgrading many.  less than 5 percent of ‘AAA’ senior class ratings were negatively affected.

“Seasoned prime borrower deterioration has not been as profound as that experienced by more recently originated loans,” said Fitch Senior Director Grant Bailey.

Today’s rating actions reflect Fitch’s expected collateral loss on the mortgage pools and cash flow analysis of each bond. While actual loan losses to date remain low on average for the transactions reviewed, average serious delinquency has tripled over the last year to approximately 3 percent and continues to grow due to high average roll-rates from performing to delinquency. Average roll-rates for the transactions reviewed have progressively worsened every quarter since 2008 and reached their highest level to date in the most recent quarter.

Furthermore, cure rates?the percentage of delinquent borrower who become current on their payments? have declined significantly Delinquent seasoned prime borrowers are now approximately half as likely to cure as they were one year ago.

Voluntary prepayments due to refinancing spiked for seasoned prime borrowers in the first half of 2009, but have declined notably in the third quarter as fewer remaining borrowers were incentivized and eligible to refinance.

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