Servicers have increasingly opted to stop advancing principal and interest payments on delinquent subprime loans. This trend can have broad implications for bond values, FTN Financial analysts said in a report.
For the overall subprime universe, analysts estimated that the advance rates are now at 47%versus 60% a year ago. These lowered advance rates mean a decrease in the cash flows available to the securitization trusts and an increase in the bond's average life.
FTN Financial analysts explained that the effect on front pay, senior bonds can be severe.
"Delayed payments to front pay bonds allows losses to erode the subordination levels before the bonds are paid off," said analysts in the report. "This exposes them to higher losses when they must share principal losses prorata with other senior bonds."
FTN Financial analysts showed that over the past year, advance rates have decreased steadily in subprime and have remained relatively unchanged in other sectors.