June remittance data, which reflect May activity, showed prepayments dropping further inspite of the lower mortgage rates and loss severities trending lower after rising the previous month, according to a report from Bank of America/ Merrill Lynch analysts.
Voluntary prepayments in May dipped slightly (~ 0.5% CPR) inspite of the record low
mortgage rates in April, they said. Across the four indices, voluntary prepayment speeds aside from curtailments were around 2% to 2.5% CPR.
Meanwhile, the effective voluntary CPRs after accounting for negative curtailments were 0.5%-1% CPR less. This months remittance data gives credence to the theme that subprime borrowers
are completely locked out and inspite of the historically low mortgage rates, they cant refinance because of their credit profile.
Loss severities dropped by one to three points across all the indices except for 06-2 index.
This is somewhat of a reversal versus last month when severities for all the indices except for ABX 06-2 went up by similar magnitude. As loss severities have risen over time, the variation across the different transactions and indices have shrunk quite a bit.
The CDRs were more or less flat versus last month inspite of a drop in REO inventory as liquidation rates likely picked up this month. Analysts also noted that existing home sales also rose in May by 9.2% on non-seasonally adjusted basis. They added that the REO
inventory is continuing to shrink with liquidations outpacing transitions of loans from foreclosure to REO.
BofA/Merrill had expected the roll rate from foreclosure to REO to pick up sharply after foreclosure moratorium was lifted. But, it seems that servicers are still in the process of re-tooling their servicing operations for Home Affordable Mortgage Program (HAMP) and have not moved forward with completing the foreclosure process as quickly as analysts first anticipated.
They noted that roll rate from current to delinquent is still over the combined rate of liquidation and modifications. This is why delinquencies are still building up, according to analysts.
BofA/Merrill also reported that there was no considerable pick up in modification activity across the different servicers this month. They think that servicers are facing logistical hurdles in transitioning to the new Making Home Affordable (MHA) program.
Furthermore, it will take some time for the loan modifications under this program to appear in the remittance data since a modification under the MHA becomes permanent only after a three-month trial period, according to analysts.