March 11 (The following statement was released by the rating agency)
NEW YORK, March 11 (Fitch) Prime mortgage borrowers in U.S. RMBS pools issued
since the start of 2010 are still prepaying at rapid rates, reflecting the
refinance incentives driven by low mortgage rates, according to Fitch Ratings.
Historically, high refinance activity has left poorer quality borrowers in
mortgage pools, which in turn has increased performance volatility. For recent
RMBS, however, the credit implications have been modest to date due to the high
overall credit quality of the original pools.
Last month, prime RMBS mortgage pools issued since 2010 reported an average
conditional prepayment rate (CPR) of approximately 42%. This is more than twice
as fast as the rates of outstanding prime loans securitized in earlier vintages.
The elevated prepayment rates have resulted in rapid declines to the mortgage
pool balances. In fact, only 12% of the original balance of the sole transaction
issued in 2010 remains outstanding today. Additionally, pool balances for both
transactions issued in 2011 have paid down to less than half their initial
The credit quality of the prepaid loans has been, on average, only marginally
better than the remaining loans. When compared with the remaining loans, those
that have prepaid have slightly higher FICOs (774 vs. 771) and slightly lower
loan-to-values (63% vs. 66%). As expected, the prepaid loans have higher coupons
(4.8% vs. 4.4%) and have a higher concentration of adjustable-rate mortgages
(25% vs. 6%).
Fitch does not perceive the change in the credit risk of the remaining pools as
material. This is supported by the continued strong performance of the remaining
borrowers. Of the more than 6,000 prime loans securitized since 2010, only one
loan is seriously delinquent as of the most recent reporting date.
Additionally, any potential increase in credit risk caused by prepayments has
been more than offset by an increase in credit enhancement percentage due to the
transactions' bond payment priority. The senior class credit enhancement
percentage has more than doubled from the time of issuance for all transactions
issued in 2010 and 2011.
Prepayment rates for transactions issued between the start of 2010 and the
middle of 2012 have remained notably high. That said, it appears unlikely that
transactions issued in late 2012 and 2013 will experience similar prepayment
behavior. While mortgage rates declined close to 140 basis points from early
2011 to July 2012, rates have remained relatively stable since that point. This
has provided borrowers less incentive to refinance recently originated loans.
The weighted-average coupons of the mortgage pools securitized in late 2012 and
early 2013 are among the lowest in RMBS history. As such, it is possible that
mortgage borrowers from that period never experience strong rate refinance
incentives. Even a relatively modest increase in mortgage rates from today's
levels could result in relatively slow prepayment behavior. This is particularly
true for fixed-rate mortgages. Fixed-rated CPRs below 10% (like those observed
in 1999 and again in 2006) could be experienced, potentially for a sustained
period of time.
A sustained period of slow prepayments could have credit implications for RMBS
bonds. Prime RMBS structures typically distribute all unscheduled principal
collections to the senior class during the first five years. After that, the
principal distributions shift increasingly towards a pro rata share for
subordinate classes. Slower prepayment rates during the initial five-year period
result in increased exposure for the senior class later in the transaction's
life. Fitch considers this scenario in its rating analysis and will continue to
focus on the credit implications of changing prepayment behavior as the market
eventually transitions into a period of slower refinancing activity.