For the August ABX remittance report, default rates dropped an average of 2.2 points across the four indices, according to a report from Bank of America Merrill Lynch.

The dip continues the trend of declining CDRs in the past year, BofA Merrill analysts said, as servicers work through the modification process as well as extend workouts to distressed borrowers.

The month's print, which is on the higher end of typical fluctuations, indicates that the extending timeline story is still very relevant and shows little sign of abatement. Analysts expect this to be the case for some time, since an implicit aim of the goverment's housing policy are orderly liquidations.

In the longer term, analysts expect lower defaults will occur along with increased severities. This is a result of servicers having to recoup rising amounts of advanced P&I.

Delinquencies dropped once again month-over-month, with most of the improvement from the 60+ bucket. This demonstrates the slowing current-to-30 day transition rates as well as continued efforts to work through modifications, BofA Merrill analysts said.

In terms of severities, they rose significantly for the 06-2, 07-1, and 07-2 indices this month, with values averaging 82.0%, 80.3%, and 82.6% for each, BofA Merrill analysts said. These represent changes of 8.8, 1.5, and 4.6 points on each. The 06-1 index was roughly flat at 71.5% loss severity.

The rise in severities is outsized relative to recent monthly fluctuations and the fact that severities in the subprime space have been broadly flat for more than a year. However, analysts caution that ABX fluctuations can be outsized as a result of the small deal sample in each index.

Additionally, recognition of losses resulting from principal forbearance could also cause month-to-month swings. Although analysts have been saying for some time that severities are probably biased to the upside based on rising advancing costs that occur with slowing liquidations, they warned to wait for broader subprime remittance data.

Modification rates were roughly flat month-over-month across indices at 1.11%, 1.40%, 1.31%, and 1.47% of loans for 06-1 through 07-2, respectively, BofA Merrill analysts said. 

According to analysts, the subprime sector is the most susceptible to modifications because of the distress and the high loan coupons in the sector. Analysts expect slightly increasing modification rates as Home Affordable Modification Program (HAMP) trials convert.

They also anticipate that a portion of those that fail HAMP trials will be receiving non-HAMP private modifications.

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