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“We take the view that cure rates will likely be better than we indicate. We’re being a bit conservative with our loss projections but we have a limited amount of historical data to go on,” says Ryan O’Loughlin, an RMBS analyst with Fitch Ratings.

Firstly, a great many agency bonds entered delinquency as a result of the 180-day forbearance offered in March as part of the government’s comprehensive relief package, and at the end of that period borrowers could extend forbearance for another six months.

These loans have been classified as delinquent, but Fitch expects that a great many borrowers will resume payments once all forbearance schemes have expired.

Widespread use of the generous forbearance schemes on offer means cure rates for agency bonds will be slower than for private label CRT notes, but it doesn’t necessarily mean these bonds will slump into prolonged delinquency and subsequent default.

“Even though we are not giving credit on our loss projections  we still believe that some portion of these borrowers will do better than traditional credit-related delinquencies,” says O’Loughlin.

Another positive for CRT bonds is that prepayments are still very high, which means that loans are being paid off. Moreover, it is the senior tranches which get paid down first, leaving the subordinated tranches. This means credit enhancements are being built up, forming a higher proportion of the unpaid pool balance.

So, on the one hand there are elevated delinquencies, and some of these will turn into serious and unresolved delinquencies, but on the other hand there are significant prepayments and a build-up of credit enhancements.

Overall, Fitch took actions on 1427 different classes from 67 CRT bond offerings issued between  2013 and 2020. While 372 classes were placed on ratings watch negative, another 116 were placed on ratings watch positive. A total of 108 classes had their ratings watch maintained.

The report also notes that delinquency rates have worsened since March 2020, with average 30-day delinquencies rising by 0.31%. Average 60-day delinquencies are up by 0.44%.

Simon Boughey