Subprime debt rallies as US enhances loan aid

Subprime-mortgage securities are rising at an accelerating pace as the US begins to encourage reductions to homeowners’ balances, which may lead to fewer foreclosures and a quicker end to the housing slump. A Markit ABX index of credit-default swaps tied to 20 subprime-loan bonds rated triple-A when created in the first half of 2006 climbed 3.2% last week to 49.1, the highest since January 2009, according to Markit Group. Senior-ranked bonds tied to borrowers with poor credit will mostly benefit after the Treasury Department said for the first time it would seek to cut the size of mortgages, reducing the likelihood that loan modifications will fail, according to JPMorgan Chase, Morgan Stanley and Barclays. The revised plan also supports the housing market by helping avert more foreclosures, Amherst Securities Group analyst Laurie Goodman said. The new US policy “will dramatically improve the success rate on mortgage modifications,” Goodman, who is based in New York, wrote in a March 26 report. “This will, in turn, help cushion future home price depreciation and limit further housing market deterioration.”

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