Mortgage

Critical defaults enhance for non-prime mortgage debtors

Late-stage default recovery rates in the non-prime securitized mortgage market improved significantly in the second quarter, suggesting that recovery rates are high even for non-traditional borrowers.

According to a report released by Fitch Ratings on Tuesday, the aggregate default rate of more than 90 days for securitisations in the portfolios of banking service providers fell from 13% in the previous year and from 12% in the previous quarter to 10%. The corresponding non-bank default rate for private non-prime securitisations in this category fell from 8% in the previous year to 4% and from 6% in the first quarter. The 2 percentage point decreases compared to the first quarter in both categories were the largest in the past 12 months. Since the second quarter of last year, the decline in subsequent quarters has not been more than 1 percentage point.

The numbers might suggest that those facing the highest hurdles within the large pool of borrowers with long-term deferred payments may have been motivated to exit by the economic improvement and individual recovery before many due dates should hit in the third quarter.

"With the caveat that the data is aggregated, I think the numbers make us cautiously optimistic," said Richard Koch, director of Fitch Ratings and author of the Servicer Metric Report for the second quarter. “I think what we saw in the second quarter suggests that with the economy continuing to improve and unemployment, people in the non-prime market may move off extensions and get back to work. That could be the reason why the payment defaults have decreased somewhat more. "

Anecdotal conversations with service providers suggest that some of the exits were made by borrowers who continued to make regular payments on their loans despite being lenient, Koch said. Some borrowers applied for suspension of payments due to the uncertainties associated with the pandemic, but ultimately never needed them because of the available government bailout funds or for other reasons.

Non-bank default rates for securitized subprime were generally lower than for banks as they are typically high-touch service providers, Koch said. The aggregate bank numbers are also still far higher than they were in the first quarter of last year when the US pandemic first started.

The long-term trend line for non-prime bank defaults since the first quarter shows that these are increasing, even if there are short-term declines. The long-term trend line in the same category for non-banks is pointing down.

Non-prime borrowers who get credit in the private securitized market may have lower credit ratings, non-traditional incomes, or other needs that disqualify them for lower-rate, standard indulgence government mortgages.

However, the fall expiration dates for COVID-related indulgence in the larger government-related marketplace may have played a role in motivating these borrowers. If individual securitization agreements allow, even private service providers may prefer to structure their forbearance in line with broader market practices. Some states have issued letters urging even private service providers to do so, Koch noted.

Declines in forbearance rates and new transitional arrangements likely to prevent foreclosures on owner-occupied properties from resuming for the remainder of the year could explain why servicers are doing well amid these changes, Koch said. The servicer workforce remained broadly stable, with the number of loans per full-time employee increasing at non-banks and slightly decreasing at banks. The decline in real estate holdings continued in the second quarter, albeit at a slower pace, likely due to the fact that new holdings have been restricted by foreclosure bans and properties that have been on the market for a long time are more likely to be existing properties that are harder to sell. said cook.

All of the aggregated trends in the report reflected a wide range of benefits for the individual Servicer Fitch rates. The performance varied significantly depending on the company, which was due to various factors such as the size and type of institutions or loans involved.

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