By Stacy-Marie Ishmael in New York
Last updated: October 5 2007 00:16

US subprime mortgages written during the first half of the year are going delinquent at the fastest rate this decade, according to a report from Moody’s on Thursday that analyses home loans used to back bonds. The average rate of “serious loan delinquencies” in the 2007 bonds is higher than those created last year, a vintage considered to be one of the worst-performing ever.

The ratings agency defines “serious delinquency” as loans that are 60 days or more overdue, and includes properties in foreclosure and those already foreclosed upon. Typically, subprime mortgages are used to back bonds sold to institutional investors.

“The early performance clearly shows that the 2007 vintage is worse than last year’s,” said David Teicher, co-head of the Moody’s residential mortgage-backed securities group.

“What the ultimate performance will be remains to be seen.”

Almost 6 per cent of subprime mortgages written in the first half of this year and subsequently used to back bonds went into delinquency within three months of securitisation, Moody’s data showed.

In contrast, fewer than 4 per cent of subprime mortgages originated last year went into delinquency with­in the first three months of being securitised.

Among subprime-backed bonds more than six months old, 2006 was the worst year for serious delinquencies since at least 2000, the ratings agency said.

A high proportion of the worst-performing loans from 2006 originated in California, Moody’s said. It identified falling house prices as a contributor to the overall poor performance of the 2006 vintage, and California has been particularly hard hit by house price depreciation.

First-time or purchase loans, as opposed to refinancings, also showed higher delinquency rates.

“We believe that many purchase loans were made to first-time homebuyers, who may be more susceptible to default than those that have had previous home-owning experience due to their lack of familiarity with managing the costs of home ownership,” the report said.

One of the biggest differences between the 2006 vintage and those of previous years was the high proportion of “piggyback mortgages” granted last year. Also called 80/20 mortgages, these are two loans taken out in tandem and worth up to 100 per cent of the value of the property.

Having little or no equity in their house dramatically decreases borrowers’ incentive to repay a loan, Moody’s said. Home price declines exacerbate this situation, since borrowers are faced with repayments bigger than the value of their homes.

The agency also identified the quality of a lender’s loan-origination and underwriting practices as a factor.

http://www.ft.com/cms/s/0/10e5474e-72ce-11dc-b7ff-0000779fd2ac.html

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