Broad questions about the future of U.S. housing finance and the direction of the residential mortgage market continue to cloud the outlook for U.S. residential mortgage-backed securities (RMBS), in the view of Standard & Poor’s Ratings Services. While home prices and delinquencies generally seem to be stabilizing, the future performance of outstanding residential mortgage bonds will depend on a number of factors that are difficult to predict.
We believe that if the U.S. economy remains broadly stable, the performance of U.S. RMBS issued before 2008 depends on three key variables: collateral performance, the effectiveness of structural protections, and the behavior of key transaction parties like servicers and bond trustees. Each of these factors is an important aspect of our surveillance analysis of the RMBS transactions we rate.
In our view, U.S. home prices and residential mortgage delinquencies appear to be stabilizing, but three key variables will direct the performance of rated RMBS going forward:
- Collateral performance: We believe borrower behavior is a function of many factors, but especially the potential success of loan modification efforts. For loans that do go through the foreclosure process, the longer liquidation timelines are changing the timing of losses.
- The effectiveness of structural protections: Senior bonds that were structured with additional protection against back-ended losses will likely maintain great credit stability.
- Transaction party behavior and incentives: Aside from improving collateral performance and the presence of effective structural features, we believe that varied mortgage servicer and note trustee decisions are causing wide differences in transaction performance.
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