Fitch: Second Liens Driving Alt-A Losses

Among the key factors driving a historic surge in borrower delinquencies and defaults are a preponderance of second liens among recent Alt-A vintages, Fitch Ratings said Wednesday afternoon. Loans with what the rating agency characterized as “high risk attributes such as simultaneous second liens” — also known more commonly as piggybacks — are defaulting at very high rates relative to other loans and to history, Fitch said. “There is a substantial performance divide, between loans with a SSL, and those without, with SSL loans exhibiting delinquency levels 71 percent to over 300 percent higher than those without depending on the product,” said senior director Suzanne Mistretta. “Borrowers that have perceived equity in the home, including those underwritten to a low doc program, are exhibiting significantly lower delinquency rates than their SSL counterparts.” While loans with a SSL comprise a minority portion of the overall volume, they are driving the early poor performance and higher loss expectations, Fitch said — the reason, HW has been told, is because many Alt-A deals were thinly structured to absorb losses. “There simply isn’t as much overcollateralization on these deals [relative to subprime],” said one source, an ABS trader who asked not to be identified by name. “So the loss experience may be less in absolute terms, but the damage on the bond side is no less traumatic for investors.” Fitch found that the performance of recent Alt-A vintages varies significantly by product, with hybrid ARMs exhibiting the highest rate of delinquencies and fixed-rate mortgages the lowest. And here’s an interesting tidbit:Fitch found that option ARM performance is comparable to that of FRMs for the first 12 months — but then delinquencies quickly approach hybrid ARM levels by the 18th month. Fitch said its rated portfolio of Alt-A deals is exhibiting lower absolute delinquency rates relative to the market as a whole. 2007 Alt-A delinquencies for FRM transactions are at 5 percent for Fitch-rated deals, versus 13 percent for non-Fitch rated; and 10 percent for hybrid ARMs, compared to 14 percent for non-Fitch rated ARMs. “The collateral performance gap is partly attributable to deal selection bias due to Fitch’s conservative views on risk-layering and payment shock,” said Glenn Costello, manging director at the rating agency. “Therefore, Fitch portfolio loss projections may vary markedly from those of other market participants.” Moody’s Investors Service has said it also faced a similar selection bias in the CMBS market, where its ratings criteria were the most stringent relative to competitors. For more information, visit http://www.fitchratings.com.