A new tool created by Credit Suisse First Boston to predict trends in the home-equity asset-backed securities sector has shown that early vintage pools are experiencing a decrease in delinquencies while later vintages are showing an increase.

The Home Equity ABS Tracker Index (HEAT) assesses the performance of fixed and adjustable-rate pools of vintage years since 1995 with respect to delinquencies, losses and prepayments in three major home-equity sectors: high loan-to-value (LTV), subprime and home-equity lines of credit (HELOC).

The data used in HEAT has shown that early vintage pools (1995-1996) are experiencing a decline in delinquencies and a flattening loss rate, while 1998 and 1999 vintages are showing increasing delinquencies and losses. However, those increases are in line with the seasoning of the underlying deals, the report states.

"In order to account for the effects of seasoning on performance, the HEAT measures will generally be presented by vintage year," a CSFB report about HEAT states.

Various performance measures will be incorporated into HEAT, including greater than 60-day delinquencies, cumulative lifetime losses, annual charge-off rates, and prepayments. All of these have had some impact on the performance of home-equity ABS pools.

However, one factor that has not had any significant impact on credit performance of the pools is the rising ARM interest rates. "Though it may be premature, thus far ARM borrowers have proven relatively resilient to the higher payment obligations," said Rod Dubitsky, an analyst at CSFB and author of the report.

A number of reasons were reported as to why the interest rate increases have not affected ARM pools. One is that borrowers' salaries have increased in proportion to the higher payment obligations. Another is that borrowers may have additional resources to deal with the higher payment obligations in the beginning, so they may have a lagging response to the increases.

HEAT also noticed that as seasoning occurs, there are relatively the same number of delinquencies in the pools with borrowers holding a lower loan balance, as opposed to an increase in the number of delinquent borrowers. "In 2000, the 98 vintage ARMs would have reset," Dubitsky said. "So we've seen delinquencies go up on the 98 ARMs this year a lot, but a lot of that is partly attributed to the fact that prepayments increased a lot when the ARMs reset. So when you get big prepayments, you get the pool balance dropping a lot."

HEAT was designed so investors can become aware of emerging trends and take a proactive approach, rather than reactive, when reallocating portfolios in response to developing market trends. Going forward, the market that in 1995 began growing at a rapid pace until the 1998 Russian default crisis, is predicted to remain relatively stable.

However, charge-off rates are high relative to the excess spread available in most deals, and the report notes that, "Investors should carefully review subordinate classes where losses are exceeding excess spread. Some deals that have not experienced downgrade activity may be suffering losses that exceed excess spread - for some of these, downgrades may be looming on the horizon."

The report also notes that any future issuer downgrades could quickly change the outlook for the market. "While bargains abound in the subordinate classes of many of the 1997-1998 vintage deals, investors should tread cautiously and carefully evaluate performance trends and pricing should be based on these performance trends weighed against available enhancement rather than based on the rating alone," the report stated.

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