The ABX.07-2 index began trading last Thursday, but after a fresh spate of bad news about the subprime mortgage market forced the market into a general slowdown, and with a typical summer Friday looming, the index was not expected to see much action for the week.
It also did not help matters that the new index is very similar in credit quality to the 07-1. Some market professionals, however, did note that the latest index had a better bid than its predecessor.
"It opened up [what the market thought were] air valuations," said one trader. "But it was in the midst of wide markets, so not a lot of trading happened."
Credit Suisse pointed out that there were several points of distinction between the 07-1 and the 07-2. The credit enhancement levels are higher on average for 07-2 than for 07-1, according to Credit Suisse analyst Rod Dubitsky. Although the percentage of purchase loans or purchase loans with an 80/20 structure is lower than what was present in the 07-1 index, Credit Suisse said it saw a rising share of high combined LTV loans, emphasizing the fact that the percentage of CLTV>90 is 42% in the 07-2, compared to 38.6% for 07-1.
"This observation indicates that lenders have been shifting their attention from the origination of piggyback loans to higher-LTV first-lien only loans," Dubitsky wrote. "In other words, the overall risk of first liens in ABX 07-2 could increase because of the overweights on higher LTVs in the current pools."
Loans were also more seasoned before the underlying transactions were issued. The average loan age for the 07-2 index increased to 3.5 months, from 2.9 months in the 07-1, owing mainly to drastically reduced production volumes, according to Credit Suisse.
There also appears to be a higher percentage of delinquent loans in the 07-2 index, precisely because more loans in that index are seasoned. Also, as lenders went out of business, issuers could no longer put the loans back to the lenders, so they embedded them in other deals, Credit Suisse said.
Incidentally, none of the 20 transactions that comprise the 07-2 index contain collateral from WMC Mortgage or Fremont General Corp., according to JPMorgan Securities.
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