Fitch Sees Prepayment Rate Near 7% for ‘04 Subprime RMBS

Performance of ‘04-vintage subprime residential mortgage-backed securities (RMBS) worsened as prepays increased in a review by Fitch Solutions, despite signs of stabilization among more recent subprime RMBS vintages.

Fitch’s ‘04 vintage subprime RMBS price index dropped 16.7% in the most recent month of data, while the overall subprime RMBS price index showed only a “marginal” monthly fall. The ‘04 vintage loss erased the small monthly gains among ‘05, ‘06 and ‘07 vintages.

The constant prepayment rate (CPR) and constant default rate (CDR) of ‘04 vintage subprime RMBS drove the fall, according to Fitch Solutions — advisory firm to the financial industry separate from the credit-rating firm known as Fitch Ratings.

The six-month CPR showed an uptick from June toward the 7% mark. The increase is mainly due to higher quality of loans in ‘04 vintage subprime RMBS, which makes refinancing more attainable. The six-month CPR among ‘05-’07 vintages held steady in the 3 to 4% range as higher loan-to-value (LTV) ratios kept many loans from refinancing, Fitch said.

At the same time, the six-month CDR for ‘05-’07 subprime RMBS vintages improved somewhat from peaks in May, Fitch sees no significant improvement in the six-month CDR in the ‘04 vintage.

“As the good quality loans are refinanced, the remaining pools are on average of lower credit quality, a factor that largely caused the drop in price for the 2004 Subprime Price Index,” said report author and managing director Thomas Aubrey. “Credit quality among the pools will continue to converge over time as better quality borrowers take advantage of refinancing opportunities, thus leaving the remaining pool with more consistent weaker borrowers.”

Write to Diana Golobay.

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