Subprime, Alt-A Delinquencies Rise in August: Clayton

Performance in recent vintages of both subprime and Alt-A mortgages continued to deteriorate during August, according to data released recently by Clayton Holdings, Inc. The company’s monthly InFront report noted that 60+ day delinquencies for both Alt-A and subprime mortgages had increased, while cure rates had decreased; interestingly, however, roll rates — which measure the percentage of loans that worsened in delinquency status — decreased in most areas. For 2006 subprime first liens, the 60+ day delinquency percentage reached 40.24 percent, a jump of 5.49 percent from the prior month; for 2007 vintage loans, 30.82 percent were 60 or more days delinquent, up 6.05 percent. Relative to other comparable vintages, both the 2006 and 2007 subprime vintages continue to perform significantly worse than other recent peers. Alt-A loans fared comparitively worse, with 2006 vintage first liens recording 60+ day delinquencies of 25.26 percent, up 9.44 percent from the prior month; the 2007 vintage saw delinquencies rise a whopping 16.43 percent to 22.65 percent, Clayton said. Such a steep rise in vintage delinquencies is traditionally an artifact of refinancing activity — the annualized prepayment rate on 2007 subprime first liens, for example, jumped more than 30 percent in August. But outside of the 2007 subprime vintage, all others saw the CPRs drop by double digits or more, according to Clayton. Taken together with generally slower roll rates overall (and large a jump in current loans rolling into delinquency), the trend seems to suggest that servicers may have slowed the number of borrowers moving into and out of foreclosure. Anecdotally, evidence recently suggested servicers have been doing just that. On Sept. 17, ForeclosureRadar noted a drop in California foreclosures, reporting that the number of properties scheduled for sale has doubled to 70,000 since January; of those properties scheduled for sale, 61 percent are being postponed at the banks discretion (lenders may postpone the foreclosure auction up to one year in California). “It is becoming increasingly apparent that lenders and trustees can either no longer process all of their foreclosures, or are purposefully delaying the foreclosure process,” said Sean O’Toole, founder of ForeclosureRadar. Consider the 2007 Alt-A vintage, for example, as a case in point: first liens saw the one month CPR fall 17.22 percent, while rolls decreased 13.51 percent and cures dropped 7.7 percent — and delinquencies rose by 16.43 percent. In plain English, this means that the number of borrowers prepaying their loan fell, the number of troubled borrowers able to cure their previous delinquencies or foreclosures also fell, and fewer borrowers rolled from one status to another. Yet 60+ day delinquencies rose sharply anyway. Part of the reason may be beacuse servicers — and by extension investors — are seeing loss severities increase. The Clayton report suggests that weighted loss severity for liquidated Alt-A first liens hit just over 42 percent on a rolling six-month basis during August. That was up from 39.7 percent average recorded during July. At the end of July, Standard & Poor’s Rating Services increased its loss severity assumptions for 2006 and 2007 Alt-A hybrid and negative-amortization transactions to 40 percent from 35 percent; the continuing increases we’re seeing now in Alt-A losses suggest that S&P may again revise its assumptions well before this year is out. For more information on Clayton and the InFront report, visit http://www.clayton.com.