Moody’s: Japanese RMBS to show higher recovery rates on rise in property prices
Moody’s Japan K.K. says that the rise in property prices in Japan, particularly in the Tokyo metro area, will lift mortgage recovery rates by around 2-3 percentage points on average over several years, a credit positive for Japanese residential mortgage-backed securities (RMBS).
Older vintage RMBS, which include mortgages with lower outstanding loan amounts and particularly those issued before 2006, will benefit most from the positive impact of higher property prices on recoveries.
Moody’s conclusions are contained in its just-released report on Japanese RMBS, “Higher Property Prices Will Lift Recovery Rates”. Underlining the expected higher recovery rates is that assumption that when property prices increase, recoveries rises, because homes can be sold for higher amounts to recover outstanding loans in the event that borrowers default.
As indicated, Moody’s forecast that the average recovery rate will rise by around 2-3 percentage points to around 63%-64% — compared with the historical average of around 61% for 28 Japanese RMBS we analyzed for this report — is based on the fact that prices for both detached houses and condominiums have increased since 2012. In addition, in terms of individual deals, the average historical recovery rate ranges from 47% to 83%.
Detached houses and condominiums each make up around 50% of the collateral backing mortgages in the 28 RMBS deals we analyzed for this report.
Our analysis shows that recovery rates are higher for older vintage RMBS than newer ones. The average recovery rate for 2000-2002 vintages is around 69%, compared with around 61% for 2005-2007 vintages and around 56% for 2008-2010 vintages.
One of the reasons for the lower recovery rates in vintages closed from 2005 onwards is that they may have more defaulted loans in the process of ‘special servicing’ than the older vintages, in addition to the fact that they have larger outstanding loan amounts. Recovery rates cover both defaulted loans where special servicing is completed and where special servicing is still in progress.
The final recovery rate for vintages closed from 2005 onwards may increase as the process of special servicing progresses. In some cases, borrowers who have defaulted continue to make some monthly repayments as part of the special servicing process.
The recovery rates of RMBS issued between 2009 and 2014 will also benefit from higher property prices, but less than vintages before 2006, because loan amounts have not been reduced by as much through borrower repayments.
The recovery rates of RMBS issued in 2007-2008 and 2015-2016 will benefit the least from higher property prices, particularly the latter vintages. The mortgages these vintage RMBS are for properties that were likely purchased at relatively high prices, given rising real estate prices in these periods. If a borrowers were to default, the outstanding loan amount would likely be relatively high compared with the price that the property could be sold for.
Our analysis also shows that recovery rates are highest in deals with low LTV ratios, with the exception of deals that include a large proportion of refinance loans. When LTVs are low, it means the loan is relatively small compared with the value of the property, resulting in higher recoveries if a borrower defaults and the property has to be sold.