The May remittance reports, reflecting activity in April, released yesterday showed  modification rates slightly declining with the biggest drop coming from the 07-2 series, according to a Merrill Lynch report.

The monthly modification rate in the 07-2 series dropped to about 1.4%  from 2.5% of unpaid balance the previous month in April. Even though the dip was steep, this series had seen a much faster modification rate probably as a result of rate freezes around ARM resets compared with the other series, and the drop this month brings it back in-line with others.

The overall decline across the indices might be because of logistical hurdles in transitioning to the new Make Home Affordable (MHA) program. Servicers might also have simply put new modifications on hold until they roll out the MHA program as they are not eligible to receive any incentive payments for any modifications they make under their old programs.

Even though liquidations picked up last month, Merrill Lynch analysts said that they dropped  by 2% to 3% CDR this month. Recent home sales data have been stronger on a non-seasonally adjusted basis, although April’s data are not in yet. This, analysts said, makes the decrease in liquidations surprising.

Some of this decline, according to Merrill, could be caused by the shrinking REO buckets. Loans in REO have been decreasing since around August 2008 as REO liquidations continued but the transition rates to REO had slowed down because of the foreclosure moratorium. At the recent REO-to-liquidation roll rate, the shrinking REO bucket could easily contribute to a couple of points CDR dip between this month and last month. This trend is expected to reverse as a result of servicers having lifted foreclosure moratoriums that will probably cause REO pipelines to rise again, Merrill analysts said.

They said that voluntary prepayments dipped slightly — by more than 1% CPR — after a small up-tick last month. Even though the subprime sector is locked out of credit markets for the most part, the historically low mortgage rates and seasonal turnover effect should keep prepayments somewhat stable, analysts said. That said, voluntary speeds were still offset by negative curtailments that have to do with modifications.

Loss severities rose by around a point or two in all but the 06-2 series. Beyond that, Merrrill analysts said that severities printed in a much tighter range across the various deals with fewer outliers than were seen in the past. They expect the upward severity trend to continue as home prices fall and seriously delinquent loans that had previously been stalled in the foreclosure process begin to be liquidated.

Meanwhile, another notable event, according to Barclays Capital analysts, is the JPMAC 2005-OPT1 transaction passing triggers for the tenth straight month and released principal payments to noteholders. This month, the beneficiaries were classes M6 and M7 noteholders who received $1.3 million and $2.6 million, respectively.

Neitherthe  M6 nor M7 class is one of the constituents of ABX indices. According to Barclays, the margin by which the transacionts passed its delinquency trigger — 28.26% actual versus 29.07% threshold — was much smaller compared with last month or 26.33% actual versus 29.17% threshold.

The total 60+ delinquencies for this deal rose by 192 basis points this month, after dropping or staying flat m/m for 10 months. If the 60+ delinquencies continue to rise at this pace, it's possible this deal will fail the trigger test and stop stepping down next month, analysts from Barclays said.

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