Barclays Capital updated its home price scenario to feature additional home price data through September, underlying the RMBS prepayment and credit models with CoreLogic (CLGX) home price index data through the third quarter, reflecting continued momentum in the housing market. As a result, home price appreciation is 5.5%, up from 3.1%.
Higher home prices in the new scenarios resulted in lower projected defaults and losses as well as higher loss adjusted yields, specifically in stress scenarios. Thus, large percentages of performing borrowers benefit the most from the increase in home prices due to collateral cohorts with high loan-to-value ratios.
"For subprime cohorts, which have extremely high percentages of delinquent borrowers, the effect of higher home prices is most reflected in lower severities," write analysts Robert Tayon and Chun Lin in their report.
For example, projected defaults for 2007 subprime mortgage remained somewhat unchanged at 84%. However, losses declined from 69% to 67% due to lower severities.
Click on the chart to view projected cumulative defaults and losses with new HPA scenarios.
Similar to its effect on projected losses, the home price update on loss-adjusted yields is most prominent in stress scenarios.
Base case yield increased slightly by 10 to 20 basis points, while yields in the server stress and down 20% scenarios increased 50 to 100 basis points on average.
Click on the graph to view loss-adjusted yields based on new HPA scenarios.
Servicers have the greatest effect on advance rates of principal and interest delinquent borrowers, short sale rates, foreclosure push-through rates and modification rates, according to Barclays.
For example, delinquent subprime mortgages serviced by JPMorgan Chase (JPM), Nationstar Mortgage Holdings (NSM) and Ocwen Financial (OCN) were modified at higher-than-average rates. However, mortgages serviced by Bank of America (BAC), Countrywide, PNC Financial Services (PNC) and Wells Fargo (WFC) resulted in the reverse and modified at lower-than-average rates.
In regards to principal and interest advance rates, many of the large bank servicers were at the high end while Bank of America, Nationstar and Ocwen were at the low end.
"In an attempt to capture the effect of these differences on security valuation, we are releasing a beta version of the non-agency credit model with servicer-specific adjustments to roll rates affecting foreclosure timelines, short sales, and mortgage modifications, along with updates to the servicer effects in our P&I advance rate model," the report stated.
Barclays also released three new scenarios, which mimic the Federal Reserve Comprehensive Capital Analysis and Review scenarios.
The main difference between the two is the Fed stress scenarios are concentrated in the first two years while the Barclays scenarios extended over four years, with shallower home price declines.