{"id":167907,"date":"2010-01-11T17:13:20","date_gmt":"2010-01-11T22:13:20","guid":{"rendered":"http:\/\/www.businessinsider.com\/fitch-check-out-the-payment-shock-alt-a-mortgage-holders-are-about-to-feel-2010-1"},"modified":"2010-01-11T17:13:20","modified_gmt":"2010-01-11T22:13:20","slug":"fitch-check-out-the-payment-shock-alt-a-mortgage-holders-are-about-to-feel","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/167907","title":{"rendered":"FITCH: Check Out The “Payment Shock” ALT-A Mortgage-Holders Are About To Feel"},"content":{"rendered":"

\"happyhomeowners\"<\/p>\n

Fitch offers some numbers on the coming pain for homeowners with Alt-A mortgages.<\/p>\n

—————-<\/p>\n

Many   U.S.   prime   and  Alt-A  mortgage  borrowers  that  are  making
  interest-only (IO) monthly payments will experience a payment shock over
  the next year due to a recasting of these IO loans to full principal and
  interest payments, according to Fitch<\/span> Ratings.<\/p>\n

  Over  $47  billion  of  prime and Alt-A RMBS collateral is due to recast
  over  the  next  12  months  from  an  IO  payment to a fully amortizing
  payment. This recast exposes borrowers to an average payment increase of
  15%  and  possibly  higher if interest rates increase<\/strong><\/span>. Over the next two
  years,  a  total of $80 billion of prime and Alt-A loans, and a total of
  $50 billion Subprime loans are due to recast.<\/p>\n

  This  payment  shock  will  have  a  substantial effect on the recasting
  population,   according  to  Managing  Director  Roelof  Slump.  ‘60-day
  delinquency  rates  have  risen  over  250%  in  the 12 months following
  previous  recasts  for  prime  and Alt-A loans,’ said Slump. Even though
  Fitch<\/span>’s  current  ratings  consider  the  risks  of upcoming IO recasts,
  ‘mortgage  pools  with significant interest-only loan concentrations may
  be downgraded if performance is worse than anticipated.’<\/p>\n

  Recasts  typically  have a significant impact on loan performance. While
  only 3.3% of prime loans are 60 or more days delinquent prior to recast,
  delinquencies  the  year after recast increased to 9.3%. Similar effects
  have been seen in Alt-A and subprime, with delinquencies increasing from
  12%  to  29%  for  Alt-A, and from 20% to 58% for subprime. Furthermore,
  ‘declining  borrower  equity  is still eroding refinancing opportunities
  and  incentives  to  continue  payment,’ said Slump. On average, current
  loan-to-value  (LTV) ratios for prime and Alt-A loans are 118%, with 64%
  of borrowers having negative equity.<\/p>\n

  The  effect  of  higher  expected  defaults  on  IO  loans figures to be
  relatively  small  on  the  overall market since these loans account for
  only  8%  of  the  securitized  non-agency  market.  However,  there  is
  significant   performance   risk   in   RMBS   transactions   with  high
  concentration  of  IOs,  particularly if a large portion of loans recast
  around  the  same  time. It was not uncommon to see IO concentrations of
  greater  than 50% in certain securitizations. Performance on these pools
  will  be  particularly  hard-hit  by recasts. If observed IO performance
  results  in  higher  than  expected loss estimates for Fitch<\/span>-rated RMBS,
  this may result in further negative pressure on long-term ratings and\/or
  Recovery Ratings (RRs).<\/p>\n

  Loans  with  an  IO  feature  were available across all of RMBS and were
  compatible with both fixed- and adjustable-rate mortgage (ARM) products.
  Fixed-rate  IO borrowers only face a payment increase equal to an amount
  of  principal  amortization  when  the  IO period ends, with the payment
  staying  fixed  thereafter  for  the life of the loan. ARM IOs also have
  interest  rate  risk, where the payment can increase based on prevailing
  interest  rates  at the reset date. In today’s environment, ARM IOs will
  only  face  a  payment  increase from principal amortization when the IO
  period  ends. However, ‘if rates rise on subsequent reset dates, so will
  the monthly payments,’ said Slump.<\/p>\n

  Most  outstanding  IO  loans  are  ARMs as many borrowers combined these
  features  to  provide for the lowest initial payments. Of those IO loans
  recasting  in the next two years, 99% of prime, 94% of Alt-A, and 90% of
  subprime  are ARM loans. Furthermore, borrowers were often qualified for
  loans  on their ability to make initial IO payments rather than the full
  principal  and  interest (P&I) payment to which their loan would adjust,
  and  on  63%  of Prime and Alt-A loans, this qualification was made with
  less than full documentation of income.<\/p>\n

  Most IO ARM loans featured interest rates based off of Treasury or LIBOR
  interest  rates plus a margin. Payment shocks can be mitigated by market
  interest  rate  decreases  for  Prime  and Alt-A ARMs. Subprime interest
  rates  are  typically  floored  at  the  initial  rate,  which  prevents
  borrowers  from  benefiting  from a decrease in rates. As interest rates
  are  at historic lows, some Prime and Alt-A loans which had high initial
  rates but low margins will not experience a payment shock at recast even
  when  considering  the  principal  repayment component. However, current
  average  payment  shocks  are  estimated at 15%, and each 1% rise in the
  benchmark  rates  corresponds  to an approximate 10% increase in payment
  shock.<\/p>\n

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