Fitch Predicts Half of All Prime Mortgages Will be Underwater

The sputtering U.S. housing market will result in more prime borrowers being pushed further underwater on their mortgages, according to Fitch Ratings in a new report. Recent analysis by Fitch shows that more than 30 percent of all prime borrowers in private-label securitizations are currently in a negative equity position on their mortgages. "With home prices likely to decline another 10 percent, roughly half of prime borrowers will wind up underwater on their mortgage," said Managing Director Grant Bailey. Fitch also found over 12 percent of all prime borrowers are seriously delinquent on their mortgages. "Prime mortgage default rates will stay elevated as home prices fall further and unemployment remains high," said Bailey. 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. While Fitch either affirmed or upgraded 58 percent of prime RMBS ratings, 42 percent of prime RMBS ratings, primarily those already rated 'B' or below, were downgraded further by Fitch. Further, approximately 97 percent of investment-grade classes that Fitch downgraded were already on Rating Watch Negative prior to the rating revision. Fitch has cited borrower equity as the pre-eminent driver of mortgage default performance in its new rating model. The number of underwater borrowers is likely to increase over time. With this latest rating review now complete, however, the application of Fitch's new criteria should result in greater rating stability going forward.