The release of the December ABX remittance reports showed default rates on each index  down on the month, with the exception of the 07-2 index, according to Bank of America Merrill Lynch analysts.

They said that the impact of halted or delayed foreclosure completions and REO sales are still being realized.

Default rates came in at 8.4%, 9.9%, 9.8%, and 9.5% CDR for the 06-1 through 07-2 indices, which shows changes of -0.2, -1.3, -1.0, and +0.8 points, respectively, Merrill BofA analysts said.

The gain in the 07-2 index comes after a month where that index printed an outsized decrease of negative 1.9 points. The changes in CDRs this month are mostly in line with prior dips. the analysts said.

In the upcoming months, banks should see the end of the temporary suspensions they did in September and October, which could cause a short-term bottom for falling default rates.

Generally, the BofA Merrill analysts' initial assessment has proven true, which is to fade the foreclosure issues in terms of their valuations.

This month also saw severities rise once again for each index except for the 07-1. The increase was somewhat muted given last month's rise. Weighting for liquidation balance, severities rose this month by 1.9, 1.4, -1.1, and 6.4 points to values of 78.3%, 85.6%, 82.8%, and 90.7% for the 06-1 through 07-2 indices, the analysts noted.

Higher volatility in severity prints is apparent, and will happen regularly for as long as CDRs stay low. However, considering this, analysts said they believe that severity risk is still to the upside given the higher advancing costs that come along with slowing liquidations. Investors will need to see through the volatility and look more and more at severity trends.

There are a few points to look at in terms of increasing severities. The first thing is that slowing CDRs are in line with increased volatility in severities. Since severities are measured from losses on defaulted loans, lower numbers of defaulted loans lead to lower severity sample sizes month to month and thus higher variance. 

The differences in the reporting of potential losses that result from loan modifications have skewed the severities of some deals versus others. Those servicers reporting principal forbearance as a loss have shown increased severities versus those that do not, analysts said.

Modification rates were mixed month-over-month at 0.91%, 1.23%, 1.01%, and 1.22% of loans for 06-1 through 07-2, respectively, according to BofA Merrill analysts.

The subprime modification rates have been dropping since they peaked in March after the Home Affordable Modification Program's (HAMP) ramp-up, according to analysts. They expect that private modifications will play more of a role compared with HAMP. This is barring any government revisions to this program.  

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