With the integration of its servicing platform into Washington Mutual's Northridge completed, Long Beach Mortgage collateral should begin performing more consistently, according to Banc One Capital Markets. But even with improved performance, expected supply increases in 2003 is seen pressuring spreads.
With roughly a six-month lag period between performance improvements and investor comfort in the improvements, Banc One's Glenn Schultz notes that investors have not yet recognized the improved performance in the Long Beach portfolio. Now, with delinquencies and losses continuing lower from last December through June 2002, Long Beach's collateral may start to outperform industry averages.
The reason for this anomaly in losses, Schultz notes in this month's Prepayment Insights, was the inevitable problems that arise during a servicing transfer, despite the fact that servicing operations moved a mere 60 miles. "The transfer of servicing operations resulted in greater-than-expected employee turnover and the distribution of inaccurate payment coupons to many borrowers," the report states, leading to an influx of upset borrowers. "This resulted in fewer outbound calls and a commensurate increase in the number of loans serviced per full-time employee."
Now, one full year after being fully integrated, synergies between Long Beach and parent WaMu should be realized. "It just takes some time operationally to get the pools back on track," Shultz said.
"New employees need to trained and borrowers will also need time to cure from their delinquency buckets."
This cure could not come at a better time for 1999 and 2000 vintages, which are just getting past the peak prepayment periods for the 2/28 and 3/27 Hybrid ARM product, which makes up a combined 84.1% of the Long Beach subprime portfolio.
For example, 2/28 ARM product peaks at just over 60% CPR in its twenty-fourth month, declining almost as rapidly as they spike following the expiration of the prepayment penalties - meaning that 2000 vintage product is on the cusp of a rapid decrease in voluntary prepayments. By the thirty-sixth month, which the 1999 vintages are currently in, prepayments decrease to the more common 30% CPR area before heading even lower.
Roughly 87.3% of the 2/18 set a two-year threshold and 84.4% of the 3/27 ARM originations set a three-year threshold dissuading prepayments.
But supply remains a concern for Long Beach, with increased ABS volume forecasts that would put Long Beach on par with Countrywide Home Loans and GMAC-RFC in terms of ABS volume next year. Earlier this year, Long Beach said it expects up to $20 billion of ABS new-issue volume in 2003.