Delinquencies rose at the slowest pace in a long time with all the indices experiencing less than a 0.3 point rise in 60+ day delinquencies.

The slower rate of delinquency increase might be driven by the rise in modification activity and probably some improvement in current-to-delinquent roll rate, according to Bank of America Merrill Lynch analysts. 

Severities were lower by two to three points in the 06-1 and 06-2 indices, although higher in the 07-1 and 07-2 indices. But, the rise in the 07-1 and -7-2 indices was caused by the losses associated with modifications in HEAT 2006-7 and HEAT 2007-2.

Analysts said that if they had been excluded, these indices would have also seen a considerable drop. The dip in severity was likely due to an increase in the proportion of short sales. Meanwhile, voluntary prepayments (CRR) and defaults (CDR) were basically flat across the indices, they reported.

Home Affordable Modification Plan (HAMP) modifications are starting to "hit the tape," said BofA Merrill analysts.

They added that modification rates broadly rose across the indices this month. The modification rate for 07-1 series dropped, but it was driven by the dip in modification rate for CARR 2006 NC4. This deal had printed a 5.8% rate last month. Excluding this transaction, the series saw an increase as well.

Much of the activity seems to have been driven by HAMP modifications. As the Treasury Department reported, which BofA Merrill analysts cited in their report, the first round of HAMP modifications was made permanent over the last few months.

These modifications are finally beginning to clearly show up in remittance data. Many of the modifications reported have had their rate brought down to 2%, which is the HAMP rate floor. For example, BofA Merrill analysts said GSAMP 2006-HE3 had 42 modifications this month, 18 of which had a 2% mortgage rate.

Moreover, of the 1,888 cumulative modifications performed on this offering, only 32 have had a modified rate of 2% and all 32 came in the last 4 months.

According to analysts, more interesting samples of HAMP modifications showing up in the remittance data come from HEAT 2006-7 and HEAT 2007-2 of the 07-1 and 07-2 indices, respectively.

These transactions experienced a significant rise in modifications this month. But, most of the modifications had no rate change.

For instance, of the 149 loans modified this month in HEAT 2007-2 only 4 had a rate change. Surprisingly though, 140 of the modifications saw principal forbearance. The PSAs for these deals explicitly prohibit rate reductions below the initial rate on the loan. 

This is why these mortgages skipped the first step of the HAMP waterfall and went straight into the term extension and principal forbearance steps.

Additionally, the forbearance amounts were treated as a loss that was caused by drastically inflated severities on both deals, analysts said. 

"We expect modification rates to continue to increase over the next few months as the backlog of HAMP trial modifications are converted into permanent modifications," they wrote.

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