One of the strongest U.S. residential mortgage vintages is now increasingly susceptible to rating downgrades with adverse selection being the main culprit, according to new research by Fitch Ratings.
Fitch Ratings determines that delinquency rates were increasing in ‘pre-2005 prime pools, even while performance has improved for Alt-A, subprime and recent vintage prime mortgage pools. For pre-2005 prime pools, the roll rate from current to delinquency over the most recent three months was the highest for any three-month period in the cohort's history, and total delinquency is roughly 1.3-times higher than 2011 levels.’
Fitch Ratings adds that of the roughly $650 billion in prime residential mortgage-backed securities (RMBS) which the company rated prior to 2005, only three basis points of principal loss have been incurred to date on rated bonds, and more than 93% of the principal balance has been fully repaid. Only approximately 4,000 of the initial 33,000 classes rated remain outstanding.
‘Weakening performance metrics and deal structure vulnerabilities have increased negative rating pressure on the remaining classes,’ Fitch Ratings says. ‘However, pre-2005 senior classes at risk for downgrades are still generally expected to retain investment-grade ratings and thus are expected to recover full principal even if actual mortgage loan losses are worse than currently expected.’