The May remittance reports showed subprime collateral having improved delinquency roll rates, lower cure rates, and slower pre-REO liquidation speeds, according to Barclays Capital.
These observations could be early positive signs that the performance of loans with lower credit quality and weaker equity position has started to stabilize, although more data is necessary, according to analysts.
Subprime delinquency roll rates unexpectedly retreated in May, despite negative seasonality. While rates fell from March to April, roll rates for loans with equity (ie, MTM CLTV<100) remained almost the same from April to May but deep underwater loans (ie, loans with 120-160 MTM CLTV) continued to experience declining roll rates in May.
Other credit-impaired sectors, such as Alt-A and option ARM loans, also showed similar patterns as subprime, while prime roll rates have been relatively unchanged in the past three months, Barclays analysts stated.
The roll rate from “current never 30+” to 30-day delinquency fell 10% to 17% on a relative basis across vintages, while the delinquency rates of “current ever 30+” bucket — most loans in this bucket were previously modified loans — remained flat or slightly decreased.
Cure rates of serious delinquent loans also declined across vintages. As most loans were cured by modifications, the recent decrease in cure rates might mean that servicers have started transitioning from their traditional modification programs to the Home Affordable Mortgage Modification Program for eligible loans. Because HAMP requires a three-month trial, cure rates should continue to decline in the short term before picking up at the end of the trial period, Barclays analysts said.
As servicers began to implement HAMP, liquidations of loans in foreclosure were put on hold, so servicers could evaluate the eligibility of these loans under the HAMP guidelines.
In view of the improvement of underwater loans last month, analysts think the early-stage delinquencies will continue declining in the upcoming June remittance reports despite negative seasonality. Specifically, the 30-day bucket is expected to fall five basis points to 10 basis points for the ‘06 series and 20 basis points to 30 basis points for the ‘07.
As for the serious delinquencies, the aggregate 60+ should continue building up, and the 60+ growth rate is expected to rise this month because servicers are slowing down traditional modifications and pre-REO liquidations to evaluate loans for HAMP. This is why, Barclays said, the outflux of 60+ loans will likely be smaller in June compared with May. Based on roll rates, 60+ delinquencies are expected to rise 60 basis points, 60 basis points, 80 basis points, and 140 basis points for series 06-1, 06-2, 07-1, and 07-2, respectively, in the June remittance reports.
By contrast, liquidation rates of REO loans, which were beyond the help of modifications, remained flat or moderately increased across vintages in May after rising 30% in April. After adjusting for day count, REO liquidation speeds made moderate gains last month but foreclosure liquidation rates fell across vintages. While favorable seasonality will result in faster REO liquidation rates, one fewer business day and a smaller REO bucket should keep REO liquidations stable this month. On the other hand, foreclosure liquidation speeds should continue to slow down as servicers evaluate foreclosed loans for HAMP. Overall, analysts expect CDR in the June remittance reports will rise 40bp for 07-1 and decline 100 basis points to 140 basis points for the other series.
Nationwide REO inventories declined by 5.2% to 725,600 on May 1 from 765,500 on April 1. However, 90+ day delinquencies, including foreclosure and REO, increased 5.6%, to 4.6mn from 4.3mn loans, in the same period. It is estimated that the decrease in REO is due to servicers holding loans in foreclosure in consideration of possible HAMP modifications. A delay in REO without a rapid and aggressive modification program should result in a commensurate rise in the 90+ day delinquency and foreclosure bucket, a phenomenon we continue to observe in securitization data.
States with declining REO inventories also show a growth in foreclosure stock. The 5.2% fall in the REO bucket is coincident with a substantial 8.1% growth in the 90+ delinquency bucket. Therefore, while REO inventories alone offer a more exact measure of housing pressure, 90+ day delinquencies, including foreclosure and REO, provide a more stable indicator of distressed inventories.
Roughly 60% of the rise of the 90+ day delinquencies, including foreclosure and REO, is a result of prime/agency loans, with the remainder roughly split between Alt-A and subprime. Total REO inventories are expected to continue declining over the next few months with a 3% to 4% decrease line next month as servicers evaluate the HAMP. After this point, delinquency and foreclosure backlogs should cause REO to rise again.
As traditional modifications start to slow down and HAMP modifications are still in the evaluation or trial stage, the bias of CRRs should be smaller in the next few months and CRRs will likely improve in the short term before taking a nosedive at the end of the HAMP trial period. CRRs should gain a moderate 10 basis points  to  30 basis points this month. Total prepayments should come in at 21-24 CPR across series in June, and defaults should account for 92%, 93%, 91%, and 89% of total prepayments for the 06-1 through 07-2 series, respectively.

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