Fitch: Prime RMBS loss estimates way too low

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This comes from Angus Robertson of Research Recap.  Expect some major writedowns here going forward:

A dramatic rise in delinquencies has led Fitch Ratings to raise its average loss estimates for recent vintage jumbo prime mortgage pools to between 3 and 5 times higher than its previous estimate.

Fitch’s revised average loss estimates as a percentage of the remaining pool balance for recent vintage jumbo prime RMBS are as follows:

Fixed-rate loan pools 2005: .97; 2006: 2.05; 2007: 2.58.

Hybrid ARM pools 2005: 1.60; 2006: 3.55; 2007: 4.81.

These 2005, 2006 and 2007 revised loss estimates are approximately three, four and five times higher, respectively, than the prior loss estimates.

In analyzing recent prime mortgage performance Fitch found that:

  • Loans with multiple risk attributes such as limited income documentation and second-liens, are defaulting at rates approximately three times that of loans without those characteristics;
  • A growing percentage of prime borrowers have lost all home equity due to declining home prices. Borrowers with negative equity in some recent vintage mortgage pools are approaching 50%;
  • After adjusting for home price declines to date, loans estimated to have no equity in the property are defaulting at rates approximately three times that of loans estimated to have equity remaining.
  • In addition to high default rates, recovery rates on defaulted loans are also trending downward.

“Delinquencies have risen dramatically for prime RMBS transactions as borrowers have come under increasing pressure from declining home values, lack of mortgage financing, and rising unemployment.”

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