Investors in residential mortgage-backed securities believe home prices will hit bottom but default rates will improve in the next 12 months, according to a survey by a unit of Standard & Poor's Corp.
The survey tracks valuation projections by 64 financial companies that are active in the U.S. and European structured finance markets. It was conducted from Sept. 14 to Oct. 16, and S&P released the results last week.
Compared to a survey taken three months earlier, expectations for loan default rates included in 2007-vintage securities declined by 12 percentage points, from 30%, for alternative-A loans and to 23%, from 30%, for subprime loans.
However, prime fixed-rate loan delinquencies for 2007-vintage residential mortgage-backed securities rose from 2% to 4%.
"Because the majority of poorly performing securitized U.S. mortgage loans have already defaulted or paid down, default rate forecasts for underlying collateral on U.S. alt-A and subprime [residential mortgage-backed securities] are stabilizing versus expectations for U.S. prime" bonds, said Peter Jones, the global head of S&P's valuation scenario services business.
"Furthermore, default-rate expectations for U.S. mortgage loans — although improving across most asset classes — remain significantly higher than [for] U.K. loans, which are expected to deteriorate across all classes," he said.
