Investor forecasts for US home prices for the next 12 months are trending upwards, with the projection for average home prices in Los Angeles to increase from -22% in Q2 to -13% in Q3; in Miami from -23% to -16% and in Dallas from -9% to -5%. On the whole, investors expect the US real estate market to reach a bottom in the next 12 months.
Mortgage default rates have followed suit, with projected default rates for the underlying loans in US Alt-A and Sub-Prime RMBS improving since the Q209 survey. Expectations for default rates on loans in 2007-vintage RMBS are down to 12% from 30% on Alt-A and to 23% from 30% on Sub-Prime.
In the market for Prime Fixed Rate RMBS, loan default rate projections have increased slightly from 2% in Q2 to just under 4% in Q3 for 2007-vintage deals, while loss severity projections have decreased notably for the same time period.
"Because the majority of poorly performing securitized US mortgage loans have already defaulted or paid down, default rate forecasts for underlying collateral on US Alt-A and Sub-Prime RMBS are stabilizing versus expectations for US Prime RMBS," says Peter Jones, Global head of S&P's Valuation Scenario Services business.
"Furthermore, default rate expectations for US mortgage loans - although improving across most asset classes - remain significantly higher than UK loans, which are expected to deteriorate across all classes. Clearly, respondents see the UK and US assets in two very distinct ways."
UK RMBS:
When assessing asset class performance across an entire vintage, average default rate forecasts for 2004, 2005, 2006, 2007 and 2008 vintages on UK Non-Conforming Loan (NCL) RMBS climb from 8.2% for the period covering the next six months to 9.8% for the period covering 12 to 18 months from today. Default rates on all vintages of UK Prime RMBS are also expected to increase, from 1.8% to 2.2% over the same period.
Following these peaks, forecasters do not expect default rates to return to the historically high levels predicted for the next six months on either UK Prime or NCL RMBS for at least another two and half years.
Market participants on average expect a 7% decline in UK house prices over the next 12 months, down from a 10% decline forecast in our Q2 survey. However, there is no consensus regarding the timing of the bottom of the market - for each of the next five quarters less than 20% of respondents are predicting the beginning of a recovery.
Despite stabilizing house price expectations, over the next 12 months forecasts for loss severities (the severity of any actual losses occurring on the collateral in default) on UK NCL RMBS have risen to 36% from expectations of 31% revealed in our Q2 survey.
"The increased expectations for loss severity on UK NCL RMBS may well be influenced by banks' inclination to step up repossessions - crystallizing any losses on the corresponding loans - on account of the apparent stabilization in house price declines," says Peter Jones.
The Survey
The survey was conducted between 14th September and 6th October with 64 participating institutions split between the buy-side and sell-side - 32 in Europe and 32 in the US.
Developed to provide greater transparency into the assumptions investors are using to determine the value of their RMBS portfolios, the quarterly Valuation Inputs Consensus survey has been designed to develop clear valuation benchmarks based on the input of buy-side and sell-side participants in the RMBS market. Market participants are invited via the survey to provide their views on the default rates, delinquencies, prepayment rates, loss severity and recovery lag assumptions in the US and Europe. The study also tracks investor expectations on key variables such as house price movements, which are used to value prime and non-conforming RMBS.
