In California, Rates of Delinquency Vary, Mostly Driven by Negative Equity

Mortgage performance in California — although not substantially different than that of the US — varies dramatically among regions within the state, according to a study of all securitized non-agency mortgages in the state by credit-rating agency Fitch Ratings. “Delinquencies are highly correlated with the level of negative equity,” said Fitch managing director Roelof Slump. “Regions with the largest home price increases have also seen the most precipitous declines.” “Property value declines in California are having a dramatic effect on a borrower’s willingness to pay,” Slump added. These trends are particularly relevant to gauging the overall performance of new and existing mortgage-related securities, Fitch said, as California represents approximately 50% of the overall non-conforming mortgage origination volume. The Fitch study concluded that 60+ delinquency rates for prime loans are at 12% in California, compared to 10% nationally. The delinquency rates for other sectors are similar as well, including pay-option adjustable-rate mortgages (ARMs) (47% vs. 46%), subprime (50% vs. 47%), and Alt-A excluding Option ARMs (both 28%). Fitch noted dramatic disparity among various regions within the 382 metropolitan statistical areas (MSAs) tracked. For instance, California includes both the best performing region in the country, San Francisco, and the worst performing regions — such as Riverside at 367th. Riverside’s 23% prime 60+ day delinquency rate more than five times that of San Francisco (4%). Fitch said this performance difference is consistent across all sectors, with 50% of non-prime mortgages more than 60 days delinquent in Riverside compared to only 23% for San Francisco loans. Even Option ARM and subprime loans from San Francisco outperform Alt-A mortgages from Riverside. The house price swings have been just as varied. Fitch found that, from 2000-2006, house prices in San Francisco increased by 81% and have since declined 22% from the peak. Over the same period, prices in Riverside jumped 193% and since declined 55% from the peak. Consequently, 90% of Riverside mortgages are now considered “underwater,” with nearly 60% of borrowers owing more than 150% of the value of their home. Fitch estimates the weighted average current loan-to-value (LTV) ratio in Riverside to be 164%. By comparison, less than 1% of San Francisco mortgages are more than 50% underwater, with a weighted average current LTV of 81%. Nationally, Fitch found that 39% of underwater borrowers and 58% of borrowers more than 50% underwater are 60 days or more delinquent (compared to 18% for non-underwater mortgages). Conversely, the four California MSAs with the lowest level of home price appreciation from 2000-2006 have the lowest level of delinquency rates. The report does not include information on how this data may impact the performance of the securitized pools. Write to Diana Golobay.

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