Subprime Delinquencies Drop Again as CDS Prices Return to 2008 Levels

Delinquencies in subprime residential mortgage-backed securities (RMBS) fell in the third straight month as Alt-A RMBS delinquencies fell in the second consecutive month, according to the latest data from Fitch Ratings. Subprime RMBS delinquencies fell to 44.8% in May, from 45.2% in April. The rate is still up from 28.3% the same time last year. Fitch found in a separate survey that prices of US subprime credit default swaps (CDs) grew 7.6% from last month and are now at levels last seen in December 2008. “Subprime asset quality has not only stabilized, but begun to improve significantly, a far cry from the historic lows at the beginning of 2010,” said Fitch managing director Thomas Aubrey. All vintages showed signs of growth, with prices of 2004, 2005, 2006 and 2007 vintages rising 10%, 2%, 14% and 12% respectively. Subprime CDS values were helped in part by improving 60- and 90-day delinquency rates across all vintages. Fitch found that Alt-A RMBS delinquencies fell to 33.9% from 34.1% in April, but are still up year-on-year from 28.3% in May 2009. They mark the first two monthly declines after four years of increases. Fitch projects that 37% of performing subprime loans and 9% of performing Alt-A loans are modified and therefor carry a substantial risk of re-default. While delinquency rates are easing slightly in subprime and Alt-A collateral, the prime sector is still feeling pain. Prime jumbo RMBS grew more delinquent in May, with 60+ day delinquencies rising to 10.3% from 10.2% in April. Five states with the highest dollar volume of prime RMBS loans outstanding — California, Florida, New Jersey, New York and Virginia — represent roughly two-thirds of the total sector, Fitch said. California, representing 44% of the market, saw prime jumbo RMBS 60+ day delinquencies rise to 12% from 11.9% in April. Delinquencies in New York, which represents 7% of the market, rose to 7% from 6.8%. Florida, representing 6% of the market, rose to 18% delinquent, from 17.8% a month earlier. Virginia, representing 5% of the market, held its 5% delinquency rate seen in April. New Jersey, representing 3% of the market, saw delinquencies rise to 8.5% from 8.4%. Write to Diana Golobay.

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