Subprime Default Rate as High as 49 Percent

July 6, 2009 No Comments »


It seems as if things keep going from bad to worse with respect to home loan default rates.

And if previous downgrades are any indication, things will probably continue to deteriorate as time goes by.

Today, Standard & Poor’s once again upped expectations for losses on U.S. mortgage securities tied to Alt-A loans and subprime mortgages, the riskiest types of home loans.

These types of securities have already been downgraded multiple times since the mortgage crisis got underway a couple of years ago, and there’s no reason to believe they won’t suffer more.

The latest downgrades are a result of declines in market value of the debt and a surge in bank-owned properties, known now as the shadow inventory.

S&P now expects the default rate on subprime loans issued in 2005, 2006, and 2007 to be 11 percent, 30 percent, and 49 percent, respectively.

Subprime loans originated in 2006 and 2007 have performed particularly poorly as home prices peaked around that time and then fell precipitously, leaving many with negative equity and highly unaffordable mortgages that couldn’t be refinanced once credit markets locked up.

A mortgage is generally considered subprime if the borrower’s credit score falls below 620, while Alt-A loans are typically characterized by reduced documentation.

Securities tied to these types of loans are selling for just pennies on the dollar, as they’re now valued based only on remaining interest payments that may be collected.

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