The July remittance reports offered no surprises, staying true to analyst expectations of further credit performance deterioration.
In terms of delinquencies across the four series, Barclays Capital's projections were consistent with July's actual results.
The 1.3% 06-2 increase on the 60+ bucket was very much in line with the projections, while the 0.5% increase on series 06-1 and 1.5% increase on 07-1 and 07-2 were also not far off the mark.
Although some Street analysts reported that delinquencies might be reaching a peak in the 06-1 series, a mortgage analyst argued otherwise, cautioning that it is still premature to claim that subprime delinquencies are flattening.
The analyst said that the loans underlying the indexes are not curing. Despite the flattening in new delinquencies, the existing delinquent loans are not becoming current, and as prepayment speeds on vintages slow, an increasing number of losses are building up in the pipeline.
With more loans moving through the delinquency pipeline and into liquidation, cumulative net losses continue to rise, as shown in the report. Overall, deterioration is anything but sluggish.
The 30-59 day delinquency bucket changed less than expected in 06-1 and 06-2 but rose more than forecasted in 07-1 and 07-2. Barclays believes this inconsistency was partly a result of the faded effect of this year's economic stimulus package.
Despite government initiatives such as the economic stimulus plan, evidence suggests that the positive effects on performance of such an initiative have dwindled. This implies that the impact of the government plans that kept economic growth positive in the second quarter is quite modest. This merely served as a bandage on the current problem at hand, the analyst said.
Initiatives of this nature only buy time, the analyst said, and lack any capability of achieving a widespread, long-lasting impact. Though there is talk about another round of stimulus payments, many market participants view the issue as a structural one, involving deeper problems such as personal credit, which requires a different approach.
Though government initiatives have the right intentions in ameliorating the performance of the indexes, the analyst said, they often attack the wrong problem, resulting in little impact and even unintended consequences, as was seen in the FHASecure legislation.
In terms of interest shortfalls, the July report indicated that they are being reimbursed through the regular operation of the interest and excess cash waterfalls.
Although servicers such as Ocwen Financial Corp. have made loan modifications on deals involving principal reduction that resulted in greater reimbursement, this issue is still not seen on an industry-wide level, as many servicers are not yet modifying loans to the same extent as Ocwen.
Total prepayments fell slightly for series 06-1 and 06-2 and inched higher on series 07-1 and 07-2, and default rates increased in all four series. This resulted in a decline in voluntary prepayments in all indices except 07-2.
Though home prices appear to be beginning to bottom out, until they decline more dramatically, it will be difficult to see that the indexes will perform better.
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