Low oil prices starting to hurt US mortgage market

[NEW YORK] Signs of a fallout from plunging oil prices have appeared in the US housing market, according to a new report from Barclays, which shows more borrowers in former boom towns were struggling to keep up with their mortgage payments.

New delinquencies on low-leverage mortgages in areas, known for oil drilling activity, rose to a high of 2.5bp at the end of the second quarter of 2015 from zero in the third quarter of 2013, according to the report.

In comparison, defaults on low-leverage mortgages in non-oil regions were capped at roughly 1bp during the same period.

Among higher leverage loans, where a borrower's debt to income ratio was 40-45 per cent, delinquencies jumped to 5.3bp versus 2.3bp for non-oil areas, Barclays said.

These early signs of trouble in oil patch regions, like North Dakota and Texas, which benefited from a rise in property values when crude was hovering around US$100 a barrel, could get exacerbated if prices remained below US$30 a barrel.

"While the data remain somewhat noisy and still relatively well controlled in absolute terms, we believe that continued lower prices will likely start to affect jobs (sic) and eventually default rates in these regions," Barclays analyst Jasraj Vaidya wrote.

The analysis was based on performance data of Freddie Mac's fledgling credit-risk transfer programme, which along with Fannie Mae has been issuing bonds to reduce taxpayers' exposure to their large mortgage portfolios.

Government agencies like Freddie and Fannie only buy loans that fit their tight underwriting standards for their agency mortgage bond guarantee programs.

Their guarantees should insulate agency mortgage bond investors from falling oil prices. But credit-risk transfer bonds - by design - aim to put the first dollar of loss on the shoulders of private investors. "At this point, you've got to start thinking that oil is telling you that something worse might be at hand," one portfolio manager who regularly buys credit-risk transfer bonds told IFR.

Last Thursday, Freddie Mac cleared its first US$996m credit risk transfer of the year at new wides.

Its 1.63-year US$252.m block of Baa2/BBB rated bonds priced at one-month Libor plus 145bp, compared to a 115bp spread it paid on its previous print in early December.

The December deal in itself was priced 30bp wider to where similar outstanding bonds were traded at the time, said an investor.

REUTERS