After taking a break in April, the three ABX.HE indices experienced an at-times brutal decline in quality last month, with 30-day and 60-day delinquencies on the rise for all indices, while analysts feared that the newest market index, ABX 07-01, was deteriorating far faster than its more established sister indices.
For the first time, ABX 07-01 30-day delinquencies were higher than those for both ABX 06-1 and ABX 06-2. The ABX 07-01, which began at the start of this year, currently has 30-day delinquencies at 4.06%, greater than ABX 06-1's 3.64% and ABX 06-2's 4.05% rates.
"That, along with the lower seasoning of ABX 07-1, doesn't bode well for [its] future performance," wrote Citigroup Global Markets analyst Rahul Parulekar in his analysis of the May index performances. The growing concern is that these heightened delinquencies on both the 30-day and 60-day front (60-day-plus delinquencies averaged 12.90%, 13.86% and 8.40%, for 06-1, 06-2 and 07-1, respectively, in May) foretell a boatload of foreclosures and loan losses hitting the market later this year.
The deterioration seems chronological in nature, with the most recent index in the worst shape, while the ABX 06-1, which hails from early 2006, appearing the most resilient. The ABX 07-1 is experiencing a fairly steep and relentless decline in quality, as JPMorgan Securities analysts said that the index's delinquency ramp "remains the steepest of the ABX series." For example, ABX 070-1 loans with average ages in the 10-year range now have 60-day-plus delinquencies that are 280 basis points and 478 basis points more than the 06-2 and 06-1 indices, respectively.
The downward slide in the ABX indices comes as further signs of the subprime mortgage collapse cropped up throughout last month. While Federal Reserve Chairman Ben Bernanke, speaking in mid-May, said, "We believe the effect of the troubles in the subprime sector on the broader housing market will be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system," that statement is little comfort to mortgage investors who face deteriorating quality on a number of fronts. Sales of existing homes, for example, fell to their lowest level in three years, according to the National Association of Realtors, in part because of subprime lenders frantically imposing tougher lending standards on borrowers.
The uptick in 60-day delinquencies eroded any gains that indices made in April, analysts said, with ABX 07-1 once again performing the worst of the lot, posting the largest increase in delinquencies since the index's inception. That said, ACE 06-NC3 was the best-performing deal in the ABX 07-1, while other standouts included Structured Asset Securities Corp 2005-WF4 and Securitized Asset-Backed Receivables 2006-OP1, which are the best performers of 06-1 and 06-2, respectively.
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