The effects of Sept. 11 are still rippling through the mortgage market causing delinquencies to rise significantly on the subprime and High-LTV front, while contributing to the decline in prepayments.
Aside from the attacks, the change in the reporting of deals by one large issuer also caused the significant uptick in subprime delinquencies.
According to Credit Suisse First Boston's monthly HEAT report, delinquencies in subprime and HLTV increased across the board.
In the High-LTV sector, charge-offs and delinquencies increased about 20 basis points while prepayments decreased between 1% to 2% across the vintages. With respect to prepayments and delinquencies, the same story goes for the subprime arena with many vintages experiencing the biggest rise in delinquencies this past year.
The CSFB report said that the World Trade Center and Pentagon attacks contributed to the trending up of the delinquency figures.
Because of the delays in the mail system caused by the shutdown of US airports, September payments (the most recently-released HEAT report reflects September payment activity) would have been received and posted by the servicer in early October. However, once these payments were confirmed as received, these delinquencies would have been reversed.
Despite acknowledging that the delinquency figures are somewhat distorted, CSFB still believes that credit did in fact continue to deteriorate in October.
Though trends in terms of delinquencies and prepayments are similar for both sectors, the charge-off numbers were different. Though High-LTV monthly loss rates increased, subprime charge-offs moved in the opposite direction.
Cited from the research report, "We believe the difference is that HLTV losses largely come from loan charge-offs (and therefore do not typically go through a foreclosure and REO sale [as would subprime loans which are mostly first liens]) and so would not be subject to the distorting effects of the 9/11 disaster."
In other words, REO sales which trigger the recognition of losses for most of subprime would be affected by the September 11 delays, distractions or disruptions. High-LTV charge-offs, on the other hand, automatically happen at a 180-days delinquent therefore would not be affected by the Sept 11 events.
Aside from this, CSFB said that a major contributor to the delinquency uptick for the Subprime HEAT Index was a change in the reporting for IMC's deals by Fairbanks Capital. Specifically, Fairbanks changed the reporting for loans under repayment plans.