Credit Performance of Non-Agency Mortgage Loans and Securities in June 2005

Key Points

• Each state of delinquency, from 30-day to real-estate-owned (REO), of prime, Alt A, and subprime mortgage loans, on average, declined in June from the prior year.
• The declines in serious delinquency rates (90-day or longer delinquencies, foreclosures, and REO expressed as a percentage of unpaid principal balances) were striking. Indeed, serious delinquency rates of prime, Alt A, and subprime loans remain near the lowest levels of the new century.
• Local labor market conditions generally improved in the past year. Payroll employment expanded by an average of 2.4% in 313 MSAs (85.3% of the total) and contracted by an average of 0.68% in 54 MSAs (14.7%). Household unemployment rates fell by an average of 11.6% in 290 MSAs (79.0% of the total), rose by an average of 8.9% in 59 MSAs (16.1%), and did not change in 18 MSAs (4.2%).
• We identify significant increases in serious delinquency rates of prime loans in 11 of 115 MSAs, Alt A loans in six of 71 MSAs, and subprime loans in three of 108 MSAs.
• We have identified 58 MSAs in 16 states that are experiencing persistently high serious delinquency rates.
• Loans in these aforementioned 58 MSAs are broadly distributed, appearing in 83.4% of prime, 92.5% of Alt A, and 97.3% of subprime RMBS.
• Non-agency RMBS with proportions of loans in the 58 MSAs that are less than 10% have greatly outperformed those with proportions that equal or exceed 10%.
• Credit performance generally worsens with the proportion of loans in the 58 MSAs: the higher the proportion of loans in these MSAs, the higher the serious delinquency rates, cumulative losses, and loss severities of the RMBS.
• Portfolio managers may improve the credit performance of portfolios by reducing holdings of securities with exposure of 10% or more to these MSAs.

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