According to Fitch Ratings, the outlook for asset performance in various North American structured finance sectors is declining for 2025. This is particularly concerning for higher-leveraged and lower-income borrowers who may struggle with affordability and refinancing challenges. Additionally, a cooling labor market may offset some of the benefits of falling interest rates.
Fitch also notes that there will be diverging trends in CMBS asset performance between older properties that are facing lower demand and require capital funding, compared to newer properties with more flexibility and environmentally-friendly features located in prime areas. Tighter lending conditions, demand-side pressures, rising expenses (such as insurance costs), labor costs, and climate-related expenses will all contribute to hindered performance.
In terms of RMBS subsectors, Fitch’s outlook is neutral except for non-prime RMBS where delinquencies are expected to increase from 2.38% in October 2024 to 3.25% by 2025.
ABS asset performance is predicted to remain stable overall; however subprime borrowers may still face challenges due to cost-of-living stresses and higher debt servicing costs.
Fitch reports that supportive market conditions over the past year have led many loan issuers (including CLOs)to refinance or reprice their loans at a high rate. As a result,the agency expects improved asset performance for CLOs in 2025 as investor confidence grows alongside falling interest rates which support increased market activity involving broadly syndicated loans leveraged defaults .
Looking ahead,Fitch anticipates increased policy uncertainty under the incoming Trump administration.Tariffs imposed on goods could lead inflationary pressures which would slow down rate cuts.This could potentially cause financial strain on householdsand businesses,resultingin an increase indelinquenciesand defaults.However,it’s possiblethat tax cutsmay help offset these additionalcosts associatedwith tariffs.
