Subprime Delinquencies Surge in July
An early look at subprime RMBS performance in July, courtesy of Clayton Fixed Income Services, Inc., suggests that a recent lull in subprime delinquencies may be coming to an end. The percentage of subprime borrowers 60 or more days in arrears at the end of last month surged for both the 2006 and 2007 vintages, up nearly 7 and 11 percent compared to June, respectively. The increase in recent-vintage subprime delinquencies came despite a sharp increase in cures, as well, signaling that the number of troubled borrowers in the subprime credit class is again swelling -- the 2006 vintage saw its cure rate rise 11.8 percent, while the 2007 vintage saw cures rise nearly 20 percent compared to one month earlier. Part of the reason, sources told HW Thursday morning, is a that a large volume of repayment plans put into place earlier this year for troubled subprime borrowers are now failing; while no updated statistics were available that time this story was published, a recent report from Moody's Investors Service found that more than 50 percent of subprime adjustable-rate mortgages modified during the first half of 2007 had become 60 or more days delinquent by the end of March 2008. "We're now hitting the back-end of a subprime repayment plan wave that ran late last year through early this year," said one source, an ABS analyst that asked not to be identified. "Those reset charts we keep seeing don't account for the delayed onset of defaults due to repayment plans." Also getting worse according to Clayton's data was average loss severity on subprime defaults, which increased to 48.6 percent in July, compared to 46.6 percent in June; higher loss severities mean lenders lose more on every loan that must be liquidated. More than a few equity-side analysts have touted slowing subprime delinquencies as proof that the mortgage mess was working itself out in recent months; they may now want to rethink their position on the issue. Alt-A continues to be problematic As we've covered here extensively, Alt-A delinquencies continued to worsen in July as well. The 2005 vintage -- which should be seasoned by now -- saw delinquencies jump an eye-opening 29 percent to 9.72 percent of remaining loans in the vintage; the increase is somewhat telling as well, given that prepayment rates actually fell by more than 5 percent in the same timeframe. To explain: High prepayment rates can cause artificial jumps in delinquency by "revintaging" performing loans and leaving the junk behind; but with CPR rates largely declining for every Alt-A vintage during July, fewer borrowers are able to refinance out of an existing loan. Beyond the 2005 vintage, 2006 vintage Alt-A loans saw 60+ day delinquencies rise from 22.74 percent in June to nearly 25 percent in July; for the 2007 vintage, delinquencies rose from 20 percent to 21.35 percent. Cure rates increased for all recent vintages during the month as well; meaning that while more delinquencies were cured, more still rolled into the 60+ day bucket regardless. Weighted average loss severity also increased for Alt-A liquidiations during July, according to the Clayton data: hitting 39.7 percent, compared to 38.6 percent one month earlier. At the end of July, Standard & Poor's Rating Services increased its loss severity assumptions for 2006 and 2007 Alt-A hybrid and negative-amortization transactions to 40 percent from 35 percent; the continuing increases we're seeing now in Alt-A losses suggest that S&P may again revise its assumptions well before this year is out. The data in Clayton's report represents an advance look at July RMBS deal performance, ahead of regular remittance dates. For more information, visit http://www.clayton.com.