LONDON - Expectations for defaults and losses in residential mortgage-backed securities continue to rise sharply in the United States, while tailing off in Britain, even as its economy has been slower to recover, a survey found.
The forecast for the 12-month default rate on U.S. prime fixed-rate mortgages in RMBS rose to 5.75 percent from 4 percent forecast in the previous quarter, according to a Standard & Poor's global survey of more than 60 buy-side and sell-side financial institutions released on Wednesday.
By contrast, its 12-month default forecast for UK prime mortgages in RMBS declined to 1.1 percent from 2 percent.
Both economies continue to suffer from high rates of unemployment and sluggish growth amid fears interest rates could rise.
But UK default forecasts are easing after previous predictions turned out to be more pessimistic than actual experience in 2009, said James West, a director of S&P's Fixed Income Risk Management Services group.
UK mortgages and mortgage securities have proven to be higher quality on average than U.S. loans after lenders stuck to tougher standards, West said.
Even the worst-performing deals had 3 to 3.5 percent defaults in their collateral pools, he added.
U.S. PROGRAMS SLOW
In the United States, mortgage default risk has risen in the face of emergency government and lender efforts, including a $75 billion plan to refinance or modify loans to troubled borrowers.
The U.S. Home Affordable Program has been slow to lower payments for the millions of borrowers in danger of default and has been criticized for failing to properly address the loss of equity that has led even steady-income borrowers to default.
The limited success of refinancing and loan modification is further expected to unleash a fresh wave of foreclosures on the U.S. market.
Yet despite the expectations shown in the S&P survey, U.S. RMBS have risen in value over the past year as traders have anticipated demand from government-related programs, such as the Treasury's Public-Private Investment Program.
The survey forecast default rates on underlying U.S. subprime mortgages would rise to 34.4 percent from a previous forecast of 23 percent. The forecast also rose for U.S. prime adjustable-rate RMBS to 10.5 percent from 6.25 percent.
For UK nonconforming RMBS, the forecast 12-month default rate fell to 4.6 percent from a previous 9 percent.
Nonconforming is the UK classification for high-risk mortgages, including borrowers with poor credit histories and others who do not meet usual criteria. The category tends to have a higher quality of loan on the whole than U.S. subprime.
The S&P survey predicted UK house prices would fall by an average 5.8 percent over 2010, worse than its forecast of an average 5 percent decline in the United States.
Falling house prices typically mean than loss severity rates rise on the mortgages that do default.
U.S. LOSS SEVERITY WORSE TOO
But again the survey found that estimates of loss severity rates declined slightly in Britain to 26.7 percent for prime and 33 percent for nonconforming RMBS, while rising sharply in the United States from the previous quarter.
In the UK, people were aggressive in their assumptions of declines in the housing markets, expecting them to be quicker and steeper than they were, West said.
The most dramatic increase in this latest survey involved 12-month loss severity rates for U.S. prime mortgages, which rose to 59 percent from 47 percent in the previous poll.
That level is now nearly in line with the 64 percent loss severity forecast for subprime RMBS, S&P said.
Some U.S. investors say RMBS prices have dropped far enough to compensate them for the risk of steep defaults but that rising loss severity may lead them to reconsider.
S&P said interviews with survey participants revealed problems specific to the U.S. prime market, which tends to include houses priced above $400,000.
Borrowers of so-called jumbo loans in prime RMBS are finding a dearth of available credit to refinance, since they often do not conform to government programs that dominate current funding.
Lower-valued houses are being snapped up as quickly as they go on the market, but there is less demand for the higher-priced properties, S&P's West said.
While these houses remain unsold, mortgage servicers must keep making payments on loans, utilities, taxes and other expenses, he said. When a sale finally takes place, they then claim those expenses back, adding to the loss severity.
(With reporting by Al Yoon in New York; Editing by Rupert Winchester)