Credit performance continued to deteriorate in the May ABX remittance reports released last week.
However, Lehman Brothers analysts said that there was a ray of hope - the pace of the increase in delinquent loans slowed down on seasoned indices. For instance, the balance of delinquent loans on the ABX 06-1 index at 34 WALA increased by a mere 10 basis points in April and 20 basis points in March, according to analysts.
Monthly losses were also lower compared with last month. This trend was probably caused by a shift away from second lien defaults/losses - resulting from burnout - to first lien defaults, Lehman analysts said. This comes with an associated decline in severities. Analysts stated that although losses as a percentage of the original balance rose by 50 to 70 basis points last month, the pace dipped to 30 to 40 basis points this month.
The remittance reports also provided evidence of the seasonal pattern of delinquencies, UBS analysts said.
They added that in months January through April, there was a drop in the pace of deterioration in the 60+ day delinquencies as well as dip in 30+ day delinquencies. These trends are consistent with what one would expect because of seasonality, analysts said. For example, analysts noted that current-to-30 day roll rates slowly dipped from their highest level in January and reached their lowest level in April, which translated to a gradual dip of 30-day delinquencies from January to April.
Furthermore, UBS analysts said that the market saw higher overall delinquencies that reflect faster roll rates because of the seasonality effect.
In terms of prepayments, Lehman analysts said that keeping in line with the trend seen in the last month, prepayments in the May remittance rose by 100 basis points to 250 basis points in the last month across the ABX indices.
Though total prepays continue to rise, analysts think that this boost is mostly because of an increase in defaults instead of voluntary prepayments. Defaults are going to continue to rise with servicers liquidating their REO/foreclosure pipelines, causing a further increase in total prepayments, analysts said.
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