Projected losses on securities backed by subprime mortgages are beginning to stabilize, according to Moody's Investors Service, but the risk of borrowers defaulting on jumbo loans is growing.
The subprime borrowers most at risk of defaulting already have, analysts said. The risk is looming however for jumbo loans, those originated above the conforming limits set byFannie Mae and Freddie Mac. More than 80% of jumbo loans backing RMBS are current but more than half owe more than the home is worth.
Comparatively, roughly 22% of all outstanding mortgages are underwater, according to CoreLogic (CLGX: 12.06+0.58%).
"Since home prices have been fairly stable over the past year, that increasing proportion of underwater borrowers likely reflects the ability of the stronger borrowers to refinance and exit the mortgage pools," Moody's analysts said.
Borrowers in negative equity are more likely to walk away or default in order to receive a modification or some other loss mitigation service. Falling home prices from a still flooded foreclosure pipeline are simply pushing more of these borrowers further underwater.
Loans considered always current or those with LTV ratios below 100% are shrinking in the jumbo space. In September 2011, these loans made up less than 35% of the jumbo universe, down from more than 50% in November 2009.
"Indeed, default rates among always- current borrowers have not come down as much as in the subprime sector, meaning that the pool of current borrowers has not strengthened as much over time," Moody's said.
The Obama administration and the Federal Housing Finance Agency revamped new rules for the Home Affordable Refinance Program to help more of these borrowers refinance into lower interest rates. Analysts at Moody's said the retooling could result in 1.6 million more refinancings before the program expires at the end of 2013, benefitting the hardest hit states of Florida and Nevada the most (see the graph below).
As of September, home prices in Las Vegas remain 63% below their peak in November 2006. But the problem is widespread. Marta Libby, a real estate agent in Victorville, California, said several rental houses she manages were bought as new housing tracts similar to Vegas at $312,000 at the peak in 2006 but are now selling for $81,000.