Unemployment Spurs Rise in U.S. Subprime Delinquencies

Rising unemployment is pushing up delinquencies in US subprime mortgages at an “alarming” rate, according to CreditSights.

“The latest numbers from our Subprime RMBS sample show a huge jump in delinquencies in the past two months, ” CreditSights says in a new report: Subprime Pool Performance Update: Delinquencies Rocket as Unemployment Rises.

All three of the vintages that we track posted their largest one month increases in October and the largest three month increases since March. As the chart shows, delinquencies as a percentage of the remaining balance in 2005 subprime RMBS had even started to fall despite the remaining balances continuing to shrink.

It is possible that delinquent borrowers are making payments to keep their mortgages at the same degree of delinquency while they wait for mortgage investors to jump on board HOPE for Homeowners.

However, we believe the rise is driven firstly by delinquency growth returning to trend after a tax-rebate slowdown and secondly by rising unemployment and rate resets creating disposable income shocks for borrowers.

CreditSights has suggested that the slowdown in delinquencies in the second and third quarters might have been the result of the second quarter tax rebates.

Unfortunately the benefits from the rebates have proved short-lived and the scale of the recent deterioration is alarming.