Standard & Poor's last week issued a research report detailing recovery statistics on defaulted structured finance securities. Of the three asset classes reviewed, commercial mortgage backed securities performed most impressively post default, returning on average 66% of principle.

Residential MBS returned 61%, while ABS trailed the three at 29%. S&P's recovery statistic ignores any interest payments received after default.

The study is particularly relevant to structured finance CDO analysis and CDO criteria, according to Joseph Hu, analyst at S&P.

"This study has many implications, especially for CDOs," Hu said. "And that's why we did it, because there were so many questions concerning recoveries."

The results will be useful in refining structured finance CDO criteria. For example, forcing asset liquidation in a CDO might not make as much sense if a certain security is expected to return more principle by holding it than the cash from a below par sale.

Meanwhile, analysts at Credit Suisse First Boston put in their two cents last week regarding recent headlines saying that subprime credit measures are imperiled, maintaining that the headlines are greatly exaggerated and based on aggregate numbers, not vintage years.

According to CSFB, vintage-year measures are more relevant for tracking performance trends, while aggregate measures suffer from the fact that they do not account for the seasoning of the portfolio.

Despite this observation, CSFB concedes that there has been slight deterioration in some credit measures in June and July. However, the deterioration is minimal and more likely a result from the fact that rapid prepayments reduced the pool balance which increased delinquency and losses measured as a percentage of the current balance, rather than a true increase in the number of delinquencies and losses.

"Once again, delinquencies are increasing slightly across both fixed and ARM indices, which higher increases seen in the less seasoned vintage years," the research said. "As stated above, some of this increase can be attributed to the increase in prepayments and associated drop in the current loan balance."

CSFB also notes that one key consideration in estimating future credit losses is real estate price trends. According to a recent survey by the Office of Federal Housing Enterprise Oversight (OFHEO), real estate prices continued to increase in the second quarter. However, unlike 2000 price changes, the level of appreciation converged to that of the national average.

Also of note, CSFB mentioned some "minor side effects" that resulted from the improvements recently made to the bank's Home Equity ABS Tracker (HEAT) index, which trackes the vast majority of home equity transactions in the market.

The enhancement to the HEAT report-generating tool will be most dramatic in earlier vintage subprime charge-offs, with the new numbers being consistently lower than previously published reports.

The new tool differs in that the data load process distinguishes between 0s and blanks. Including the "true" 0s had the effect of lowering the reported net loss rate. - MG/AT

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