Fitch Studies Delinquency-Negative Equity Correlation

While mortgage performance in California is not substantially different than that of the U.S., a closer look reveals dramatic differences among various regions within the state, according to Fitch Ratings.

Fitch recently conducted a study of all securitized, non-agency California mortgage loans. Among the study's numerous findings, one of the most notable is the high correlation between delinquencies and the level of negative equity, says Roelof Slump, a managing director with the firm.

‘Regions with the largest home-price increases have also seen the most precipitous declines," he says.

The study concluded that 60+ day delinquency rates for prime loans are at 12% in California, compared to 10% nationally. The delinquency rates for other sectors are similar as well, including those for option adjustable-rate mortgages (47% vs. 46%), subprime mortgages (50% vs. 47%) and Alt-A, excluding option-ARMs (both 28%).

However, further analysis reveals dramatic disparity among various regions within the 382 metropolitan statistical areas (MSAs) tracked by Fitch. For instance, California includes both the best-performing region in the country – San Francisco-San Mateo-Redwood City – and some of the worst-performing regions, such as Riverside-San Bernardino-Ontario, at 367th.

Riverside's 23% prime 60+ day delinquency rate is over five times that of San Francisco's rate of 4%. This performance difference is consistent across all sectors, with 50% of nonprime mortgages more than 60 days delinquent in Riverside compared to only 23% for San Francisco loans. Even option-ARM and subprime loans from San Francisco outperform Alt-A mortgages from Riverside, Fitch found.

From 2000 to 2006, nominal home prices in San Francisco increased by 81% and have since declined 22% from their peak. Over the same period, prices in Riverside have declined 55% from their peak after jumping 193%. Consequently, 90% of Riverside mortgages are now underwater, with nearly 60% of borrowers owing more than 150% of the value of their home.

Fitch estimates the weighed average current loan-to-value ratio (LTV) in Riverside to be 164%. By comparison, less than 1% of San Francisco mortgages are more than 50% underwater, with a weighted average current LTV of 81%.

Along with unemployment, ‘Property-value declines in California are having a dramatic effect on a borrower's willingness to pay,’ says Slump. Nationally, 39% of underwater borrowers and 58% of borrowers more than 50% underwater are 60 days or more delinquent (compared to 18% for non-underwater mortgages). Conversely, the four California MSAs with the lowest level of home-price appreciation from 2000-2006 have the lowest level of delinquency rates.

California represents approximately 40% of the overall nonconforming mortgage origination volume, making trends in the state important for both new and existing securities. San Francisco has a lower percentage of subprime (6%) and a higher percentage of prime loans (49%) than any other MSA in the country. By comparison, 34% of outstanding Riverside loans are subprime, and only 15% are prime. Nationally, 25% of outstanding loans are prime, and 31% are subprime.

Also worth noting is that San Francisco home prices have increased by 12% over the past year, compared to just 1% for residences in Riverside, Fitch says. California home prices will remain under stress for some time, with further home-price declines likely. The magnitude of further changes is likely to vary by region across the state, as indicated by the prior experience.

SOURCE: Fitch Ratings


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