Asset-backed securities performance set to suffer

Fitch sees defaults, arrears rising as growth slows amid tight financial conditions.

As global economic growth slows and inflation persists, the structured finance sector will see asset performance weaken in the second half, says Fitch Ratings.

In a new report, the rating agency forecast weaker performance in global structured finance, including various asset-backed and mortgage-backed securities segments, in the back half of 2024 after largely stable results in the first half.

As growth weakens and elevated inflation keeps interest rates from dropping sharply, “the vast majority” of asset performance indicators are expected to decline relative to 2023, Fitch said.

Just over half of the global subsectors “have deteriorating asset performance outlooks … reflecting the impact of inflation, higher rates and debt on corporate and household borrowers,” it said. The remaining outlooks are neutral, it said.

Fitch also said it expects “modest” increases in home prices and mortgage arrears in 2024 for most of the countries it covers.

Despite the deteriorating trends in asset performance, Fitch said it expects most structured finance credit ratings to remain stable, “supported by credit enhancement growth from continued deleveraging and robust structural protections.”

Securities backed by North American commercial mortgages account for the bulk of the issuers with negative rating outlooks (78%), given the deterioration in office real estate.

“We expect U.S. commercial mortgage-backed securities delinquencies to rise gradually through 2025, with office delinquencies nearly doubling by the end of 2024,” it said.

U.S. residential mortgage-backed securities represent another 7% of the negative outlooks, Fitch said, but issuers in this segment also account for most of the positive rating outlooks too.