Wall Street's Instruments

Fitch: Subprime Price Rally Hits Month Seven

Posted on Thursday, June 30, 2011

Prices on credit default swaps (CDS) involving subprime mortgages more than doubled their increase from last month, extending the rally to an unprecedented seventh straight month, according to the latest index results from Fitch Solutions.
Subprime CDS prices rose 1.7 percent overall, though price increases were not uniform across vintages. The headline index price increase was delivered by the 2007 vintage’s 4.9 percent gain and the 2004 vintage’s 84 basis point gain, the New York-based agency explained.
With the 2007 vintage’s 20.1 percent year-to-date price gain leading the 2011 rally, Fitch says most vintages are in the black for the year. The lone negative outlier is the 2006 vintage which saw a large monthly price decline of 8.4 percent, its second largest of the year following February’s 11.3 percent drop.
“With prices down 16.9 percent overall this year, the 2006 vintage has been the worst performer in 2011,” said David Austerweil, a director at Fitch Solutions. “The 2006 vintage has the dubious distinction of having the highest one-month constant default rate and at the same time the lowest one-month voluntary prepayment rate.”
The one-month constant default rate for the 2006 vintage is at 10.8 percent, while the one-month voluntary prepayment rate is just 0.85 percent.
The 2006 vintage also saw its 60-day delinquency rate increase by 1.6 percent last month, in line with increasing delinquency rates for very vintage.
“The 2006 vintage clearly indicates a high level of credit impairment among mortgage borrowers,” said Austerweil.
Improving subprime loan payment profiles also hit a speed bump this past month. The 30-day delinquency rate increased 4.8 percent, partially reversing the sharp declines of recent months.
“Thirty-day delinquencies are often a clear warning sign of future increases in default rates so this month’s rise should be watched closely,” said Alexander Reyngold, Fitch senior director. “This past month’s rise in 30-day delinquencies coincides with the recent weakening in labor market data.”
Fitch says another area of potential concern is roll rates, which have improved for much of the year. However, May’s remittance data illustrated new weakness in this trend.
Cure rates dropped from an elevated 7.5 percent last month to 5 percent this month, for a 33.3 percent month-over-month decline, Fitch explained. Borrowers who were 30-days delinquent were less likely to become current than in recent months, with 19.4 percent becoming current this month versus 34.3 percent last month.
Fitch says the underperformance of the 2006 vintage cannot be fully explained by its higher default rates. Another area where the 2006 vintage has demonstrated worse performance than peers is in loss severities from REO properties.
The loss severity for REO loans for the 2006 vintage is now at 83.1 percent and increasing, according to Fitch. That compares to the current 79.2 percent loss severity for the 2007 vintage.
In addition, the percent of REO loans is highest for the 2006 vintage at 4.8 percent of outstanding loans versus 3.8 percent for the 2007 vintage.
By: Carrie Bay DS NEWS

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