Fitch Solutions reported this week that its pricing index for subprime residential mortgage-backed securities (RMBS) originated in 2004 fell by 16.7 percent in November compared to just one month earlier.
Other vintages included in Fitch’s study, from 2005, 2006, and 2007, showed small gains on a month-to-month basis. The gains helped to temper Fitch’s total market subprime RMBS price index so that it recorded only a “marginal” decline, according to the firm.
While prices among recent vintage U.S. subprime RMBS continue to stabilize, 2004 is seeing a substantial drop-off in performance with no signs of improvement, Fitch said in its study.
At first glance these statistics may seem to paint the more recent vintages in a better light … showing “gains”, “stabilizing”, and other affirmative-sounding depictions. But Fitch says the reason its 2004 subprime price index is deteriorating is because the 2004 loans are higher quality.
Recent loan level analysis conducted by Fitch Solutions of the indices’ constituents revealed a significant uptick in the constant prepayment rate (CPR) of the 2004 vintage, meaning the credit-quality of a large number of these loans is high enough that they are being refinanced to allow mortgagors to take advantage of current low interest rates.
The CPR for the 2005-2007 vintages, on the other hand, remained unchanged due to the lower quality loan-to-value ratios precluding much refinancing, Fitch explained.
“As the good quality loans are refinanced, the remaining pools are on average of lower credit quality, a factor that largely caused the drop in price for the 2004 Subprime Price Index,” said Thomas Aubrey, managing director at Fitch and author of the study. “Credit quality among the pools will continue to converge over time as better quality borrowers take advantage of refinancing opportunities, thus leaving the remaining pool with more consistent weaker borrowers.”
With these weaker, diminished quality loan pools also comes a higher default rate – another factor contributing to the declining performance of the 2004 subprime RMBS, Fitch said.