Strong housing market powers subprime, Alt-A RMBS

Rising home prices and relatively low interest rates are bolstering lower tranches of residential mortgage-backed securities as well as some of the most troubled vintages, analysts claim. Deals that contain the highest percentage of delinquent and underwater loans are now more likely to perform instead of defaulting as home prices improve — a significant savings, according to CoreLogic’s (CLGX) quarterly bond tracker report.

For example, lifetime losses on subprime and pay-options adjustable-rate mortgages dropped by 823 and 552 basis points, respectively.

Additionally, the average losses in 2006 through 2008 distressed vintages also rebounded by at least 400 basis points.

The CoreLogic bond tracker is an RMBS bond assessment that monitors more than 30,000 bonds backed by seasoned nonagency Alt-A, subprime, pay-option ARM and jumbo prime loans.

"Strong home price growth and historically low mortgage rates were key factors in the improvement that we saw in first quarter performance," said Ben Graboske, senior vice president of real estate and financial services for CoreLogic.

He added, "While housing price gains continued in the second quarter, they have been accompanied by interest rate increases that could decrease future benefits for ARM-backed bonds."

Bonds at the lower end of the credit spectrum showed the most improvement. For instance, roughly 5% of bonds entered the C category, moving up from the D category, the report noted.

Other categories were relatively stable with prepayments and downgrades reducing the outstanding balance of AAA tranches by only 2%.

The bond tracker quarterly report also offers customized assessments of individual nonagency RMBS bonds, tranches and portfolios on a subscription basis with cost-effective introductory rates that vary by volume, level of service and length of engagements. 

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