RPT-Fitch: Slow US RMBS Prepayments Lengthen Default Term Risk

Tue Jun 10, 2014 9:03am EDT

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June 10 (Reuters) - (The following statement was released by the rating agency)

US prime jumbo RMBS issued since the start of 2010 are unlikely to see a meaningful increase in prepayments, even if interest rates stay low. The resulting increased average life of the mortgages in these trusts will increase the period of default risk, Fitch Ratings says.

Despite a recent decline in mortgage rates, average annualized prepayment rates for recent RMBS remained around 5% in May, down from 25% a year ago. We expect the 2013 vintage to be one of the slowest prepaying vintages on record in US RMBS as mortgage rates are unlikely to decline from the levels at which those mortgages were originated.

The slow prepayment behavior of recent RMBS could increase credit risk by exposing the trust to a longer period of default risk. We believe the bonds in the recent vintage RMBS transactions are largely protected against this risk by the unusually strong initial credit characteristics of the borrowers. Borrowers in the 2013 vintage, for example, benefitted initially from over 30% equity on average and have generally experienced strong home price growth since origination. If underwriting should loosen in the near term, the protection against this term risk could decline.

Global economic uncertainty has pushed mortgage rates down to the lowest level in 6 months for conforming loans and 12 months for jumbo loans. Rates overall have declined roughly 25 basis points in 2014, but remain almost a full point above their all-time lows from a year ago, providing limited refinance incentives for borrowers in recent RMBS.

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