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Home-Equity Overdues Keep Rising
By Ted Cornwell
If you're looking for evidence that loan performance is stabilizing, you won't find it in Moody's latest report on the performance of securitized home-equity loans.
Both delinquency and charge-off rates continue to rise, Moody's said in a structured finance special report. Moreover, the 2006 vintage of subprime home loans isn't looking any rosier either.
But the problem isn't limited to the shallow end of the credit pool. High loan-to-value ratio mortgages saw their delinquency rate rise. And traditional home-equity loans saw their delinquency and charge-off rates deteriorate as well.
The Moody's Home Equity Index Composite, which measures the 60-day plus delinquency rate on subprime, high LTV home equity and similar loan types, isn't showing any signs of a turnaround for credit performance. In the fourth quarter of 2006, the 60-plus-day delinquency rate rose to 9.22%, up sharply from the 7.61% delinquency rate seen in the third quarter. The charge-off rate rose from 0.94% in the third quarter to 1.15% in the fourth.
"Macro-economic conditions, especially the deceleration in home price appreciation, and the worsening performance of the 2006 vintage were two main drivers behind this performance trend," Moody's said.
Much has been made of the 2006 vintage, which, like the 2000 loan vintage, was made as lenders struggled to recover from falling loan volume after a long refinancing boom had lost steam. As in 2000, it appears that lenders loosened underwriting standards to approve more loans, but they also offered potentially riskier loan terms last year as well.
Warren Kornfeld, managing director at Moody's, told MSN Bulletin that the depth and pace of credit deterioration has been somewhat surprising. The 2006 subprime vintage has been hurt by the especially weak performance of loans that featured "risk layering" and loans made to people with limited homeownership experience, he said. As secondary market pricing adjusted to reflect the higher risk on these loans, lenders tightened underwriting, he noted.
"Obviously, the market has corrected significantly in terms of origination," he said.
Those "circuit breakers" in the market help to manage the eventual loss rates, he said.
Currently, Moody's expects cumulative losses on the 2006 vintage to be in the 6% to 8% range, depending upon factors such as the housing market and the ability of servicers to avert foreclosure and mitigate losses. Only time will tell how the vintage actually performs, however.
Despite the emerging credit problems, issuance remained strong last year. Moody's reported that $471 billion of new pools were added to the HEIC index last year, up from $471 billion in 2005.
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