Subprime Doesn’t Get Much Worse Than This

This will help you get your weekend off to a good start. HousingWire reports that Fitch has come out with some more massive downgrades of subprime RMBS. That’s not too shocking but the numbers behind them are. Here is what HW reports:

Fitch Ratings today made massive downgrades on various vintage ‘05 through ‘08 subprime residential mortgage-backed securities (RMBS), indicating the extent of the fallout related to subprime defaults has yet to subside.

The rating agency slashed hundreds of RMBS ratings further into junk territory. Handfuls of Wells Fargo Home Equity RMBS saw ratings drop to single-C from double-C and to single-D from single-C. A variety of JPMAC RMBS fell to double-C from triple-B and many from double- and triple-C to single-C. A handful of CitiGroup RMBS fell to single-C from double- and triple-C and others to single-D from single-C.

Fitch said the actions reflect updated expectations of default and loss from the relevant collateral pool. In terms of losses, the agency expects 17% of the original pool balance of the ‘05 vintage, 39% of the ‘06 vintage and 47% of the ‘07 vintage.

“The home price declines to date have resulted in negative equity for approximately 50% of the remaining performing borrowers in the 2005-2007 vintages,” Fitch says in a media statement today. “In addition to continued home price deterioration, unemployment has risen significantly since the third quarter of last year, particularly in California where the unemployment rate has jumped from 7.8% to 11%.”

A 47% default rate for the 2007 vintage is simply staggering but the fact that 50% of the performing borrowers have negative equity is a stunner. I assume that factor is used in projecting the expected default rate. Even if it is, I wouldn’t be at all surprised if Fitch’s current projections turn out to be too conservative.

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