The effect of halted or delayed foreclosure completions and REO sales was realized in the November ABX remittance reports, according to Bank of America Merrill Lynch analysts. This was evidenced by the fact that default rates on each index were down on the month, they said.

Analysts said that the processing freezes made by banks began at the end of September. As a result, this remittance period was the first one where the full impact could be seen.

Default rates dropped on the month by 1.0% CDR on average, they said, at 8.6%, 11.1%, 10.8%, and 8.7% CDR for the 06-1 through 07-2 indices, respectively.

Although the dip is considerable, around a 9% change from last month, it is not outsized when seen against the downward trend in default rates that occured in the past year.

The decrease in the 07-2 index was much bigger compared to the others, printing a value of 8.7% CDR, down 24% month-over-month, according to BofA Merrill analysts. The CDR shifts this month, which are broadly in line with previous drops, make analysts believe that their initial conclusion was correct, which is to fade the foreclosure issues in terms of their valuations.

Loss Severities Increase

Meanwhile, they said that there are a few points to consider in terms of rising severities. Slowing CDRs are commensurate with the rise in the volatility in severitie, analysts noted.

With severities being measured from losses on defaulted loans, lower numbers of defaulted loans result in lower severity sample sizes month-to-month and thus higher variance. Differences in the reporting of potential losses as result of loan modifications have also skewed, analysts said, the severities of some transactions versus others. The servicers reporting principal forbearance as a loss show rising severities versus those that do not.

According to BofA Merrill analysts, this month, severities rose notably. Weighting for liquidation balance, severities increased this month by of 4.2, 9.1, 3.4, and 5.3 points to values of 76.5%, 84.2%, 83.9%, and 84.2% for the 06-1 through 07-2 indices.

The higher volatility is apparent, they said. For example, in the 06-2 series, JPMAC 2006-FRE1 and SABR 2006-OP1 had severity increases of above 100 points due to the low prints last month of 34% and -30%, analysts reported.

Volatile severity prints will happen regularly, they said, with CDRs staying low. However, considering this, it has been the analysts' view that severity risk is still to the upside based on the increased advancing costs that go hand in hand with slowing liquidations. Buyers, they said, need to see through the volatility and focus more and more on severity trends.

Modifications Down, For the Most Part

Modification rates, analysts said, were down month-over-month at 0.76%, 1.25%, 0.86%, and 1.15% of loans for 06-1 through 07-2, respectively.

The subprime modification rates, BofA Merrill analysts reported, have been decreasing since peaking in March after the Home Affordable Modification Program's (HAMP) ramp-up.

Analysts are expecting an increasing role of private modifications versus HAMP. This is barring, they said, any changes the government might make to the program.
  

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