Industry News

2006 subprime loan performance will be worst in a decade

S&P report: More ARMs, low-doc loans offset higher FICOs

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Analysts at Standard & Poor's RatingsDirect say that even if home prices stabilize and the U.S. economy remains strong, the performance of subprime loans originated and resold on the secondary market in 2006 will be the worst in 10 years. Losses on the 2006 "vintage" of subprime loans securitized on Wall Street are expected to be between 5.25 percent and 7.75 percent, but could be higher if home prices fall dramatically or the country experiences a recession, Standard & Poor's analysts Michael Stock and Scott Mason said in a March 22 report. The report concludes that concerns about default rates among recently originated subprime loans is justified, given slowing home-price appreciation and potential fallout from "imprudent underwriting standards" of late 2005 and 2006. Stock and Mason compared subprime loans securitized last year to the same types of loans made in another challenging year: 2000. With the economy struggling through the aftermath of the dot-com stock market bus...