According to Fitch Ratings, the outlook for asset performance in various North American structured finance sectors is worsening for 2025. This is especially concerning for higher-leveraged and lower-income borrowers who may struggle with affordability and refinancing challenges. Additionally, a cooling labor market may counteract some of the benefits of falling interest rates.
Fitch also predicts that CMBS asset performance will continue to vary between older assets that have less demand and require more capital funding, and newer properties in prime locations that are more flexible and environmentally friendly. Tighter lending conditions as well as pressures from the demand side will continue to hinder performance, along with rising expenses such as insurance costs, labor costs, and climate-related expenses.
For most 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 in 2025; however subprime borrowers could still face difficulties due to cost of living stresses and higher debt servicing costs.
Fitch notes that market conditions have been favorable over the past year which has resulted in a high number of refinancing activities by both loan issuers CLO issuers alike.” The agency expects an improvement in CLOs’ asset performance thanks largely due investor confidence coupled with falling interest rates which should support market activity.”
However,the incoming Trump administration brings increased policy uncertainty accordingto Fitch.The implementationof tariffs could potentially leadto inflationary pressureswhich would slow downthe paceof rate cuts.This,in turn,couldincrease financial burdens on householdsand businesses,resultinginhigherdelinquenciesand defaults.However,Fitchees tax cutsmay help offset these addedcosts stemmingfromtariffs.Despite this potential hurdle,Ftich remains cautiously optimistic about future growth prospectsforCMBsand otherstructuredfinance sectors.
