Default Expectations on U.S. Alt-A Option ARM Loans Double

by: Research Recap

Investors’ default rate forecasts for collateral in nearly all classes and vintages of U.S. residential mortgage-backed securities have risen dramatically in Standard & Poor’s Fixed Income Risk Management Services’ latest quarterly survey, while predictions for European mortgage default rates have fallen across all classes and vintages with the exception of Spain.

Twelve-month default rate expectations on certain U.S. RMBS collateral have doubled since the previous quarterly survey, with U.S. 2007 Alt-A pay option ARM RMBS collateral default rate predictions rising to 25% from 12% polled in Q3.

For the same vintage, U.S. prime fixed-rate collateral default forecasts rose to 5.75% from 4.00%; U.S. prime adjustable-rate collateral default forecasts moved up to 10.50% from 6.25%; and U.S. subprime collateral default forecasts increased to 34.36% from 23.00%.

By contrast, 12-month forecasts for U.K. nonconforming loan RMBS collateral default rates across an average of vintages fell to 4.61% from 9.00% polled in Q3; for prime U.K. mortgage default rates, the 12-month average forecast for all vintages fell to just 1.09% from 2.00%; forecasts for Italian and Dutch mortgage default rates dropped to 1.21% and 1.32%, respectively, while Spanish mortgage default expectations were stable at 2.80%.