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Home-Equity Loan Delinquencies Increase

Home-Equity Loan Delinquencies Increase, Moody's Says (Update1)

By Jody Shenn

Oct. 17 (Bloomberg) -- Late payments on U.S. subprime mortgages and home-equity loans that have been turned into securities rose in July at the fastest pace since 1998, Moody's Investors Service said.

The percentage of loans more than 60 days delinquent climbed to 7.23 percent from 5.9 percent a year earlier. The rate of losses on the loans surged to 0.98 percent, from 0.74 percent, Moody's said in a research note distributed today.

Rising borrowing costs and a slowdown in home-price appreciation are behind the increase in delinquencies, according to the New York-based ratings company. New-home prices in the U.S. may likely to fall this year for the first time since 1991, and existing houses will have the smallest gain ever as a glut of properties forces sellers to accept lower offers, the National Association of Realtors said last week.

``Borrowers experiencing financial duress have not been able to refinance out of their existing mortgages or sell their homes as easily as they could have just last year,'' Moody's said.

Some of the increase was caused by the ``aging'' of loans made in the mortgage boom of recent years, said Michael Youngblood, an analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia. The amount of greater-than-90-day delinquencies and foreclosures in a pool of subprime loans typically rises by 0.3 percentage point a month in the first few years, he said.

`Chronically Weak'

Adding to the rise was ``further weakness in already chronically weak mortgage and housing markets'' in the Midwest and Gulf Coast states stung by Hurricane Katrina last year, Youngblood said.

The default rate for subprime loans rose to 7.35 percent in July from 5.51 percent a year earlier, according to Friedman Billings' calculations. Those figures are based on a larger data set from First American Corp.'s LoanPerformance unit and includes borrowers more than 90 days behind on their payments or in foreclosure. He predicted the rate may fall to 6.87 percent by July.

The Office of the Comptroller of the Currency, Federal Reserve and other agencies on Sept. 29 said bank-owned lenders needed to start offering consumers more information about loan terms before they make what are known as nontraditional mortgages and better monitor their performance.

According to Moody's Home Equity Index Composite report delinquencies on loans within the index rose from 6.74 percent in June. Charge-offs, or actual losses, fell from 1.04 percent that month.

Bond Performance

The term ``home equity'' in the asset-backed securities market typically includes first mortgages to ``subprime'' borrowers, as well as second mortgages such as lines of credit and closed-end equity loans, and home improvement loans. Subprime first mortgages represent the largest share of collateral for ``home equity'' asset-backed securities.

There were $564.7 billion of securities backed by subprime mortgages and home-equity loans outstanding at the end of June, according to the Bond Market Association. At that time, securities backed by ``home-equity'' loans accounted for 28.4 percent of the about $1.99 trillion asset-backed market, which also includes automotive, credit-card and student loans.

A Merrill Lynch & Co. index of home-equity loan-backed bonds rated AA to BBB is having its worst month this year, falling 0.09 percent.

The share of mortgages entering foreclosure at the end of June was the highest since the fourth quarter of 2004, according to a Sept. 13 report by the Mortgage Bankers Association in Washington. And prices of existing homes fell last month for the first time in 11 years as sales dipped to the lowest level since early 2004, the National Association of Realtors said Sept. 26.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net