Fitch: One In Three Prime Borrowers Are Underwater

More than one-third of all prime-mortgage borrowers in private-label securitizations are in a negative-equity position, according to recent analysis by Fitch Ratings.

With the housing market slogging along, the rating agency predicts more borrowers will be pushed further underwater on their mortgage obligations. Managing director Grant Bailey believes prices will drop further before any sustained recovery can occur.

“With home prices likely to decline another 10 percent, roughly half of prime borrowers will wind up underwater on their mortgage,” Bailey says.

Fitch also says that more than 12% of all prime borrowers are seriously delinquent. As home prices continue to fall and unemployment stays at a high level, prime mortgage default rates will likely stay elevated in the near term, Bailey says.

The combination of declining equity, rising delinquencies, growing payment-shock risk and the application of Fitch’s updated criteria led to further negative rating actions on prime residential mortgage-backed securities (RMBS) transactions in Fitch’s latest ratings review, the agency explains. Although Fitch either affirmed or upgraded 58% of prime RMBS ratings, 42% of prime RMBS ratings – primarily those already rated “B” or below – were downgraded further by Fitch.

Approximately 97% of investment-grade classes that Fitch downgraded were already on Rating Watch Negative prior to the rating revision, the agency adds.

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