February remittance reports — representing the January collection period — showed an early sign that the trend of REO stock dipping experienced nationwide might have reversed, according to Barclays Capital analysts.
The REO stock level has dropped “nearly monotonically” since September 2008, analysts said, as foreclosure moratoria and modification programs suppressed foreclosure-to-REO (F2R) roll rates.
The fraction of loans in REO rose by an average of 3% month over month, as a result of an apparent F2R rise as well as lower demand. CDRs fell across the board by an average of 3.3 points, and foreclosure stock dropped by 1.9%.
While ABX represents only a fraction of the mortgage universe and monthly data are noisy, January’s data are indicative of the environment of rising REO supply meeting lower demand that has been the basis of bearish calls. In line with this backdrop, severities rose to 72%, which is equivalent to 2.8%.
In deals where principal forgiveness or forbearance modifications are common, severity is calculated only on liquidated loans, analysts said. Severity calculations should have been higher but for the realized losses resulting from modifications included. For instance, the deal HEAT 2007-2 would have a severity of 82.8% instead of the calculated 68.6%, and HEAT 2006-7 would have a severity of 85.5% instead of 70.7%.
For the HEAT 2006-7 deal previously referred to, Barclays analysts said Intex now reports a severity of 195.85 and one-month CRR of 14.58, apparently treating deferred principal as a voluntary prepayment and not including the deferred balance as part of liquidated balances.
Barclays analysts said that if principal reduction modifications are included in severity calculations, consistency with deal factor requires that the forgiven or deferred balance should
contribute to CDR with 100% severity.
Aggregate 60+ day delinquencies (including foreclosure and REO) rose by 0.43%,
0.05%, 1.43%, and 0.94% across 06-1 to 07-2. They expect the backlog of 60+ loans to
continue rising over winter from foreclosure paralysis, the implication perhaps being
unexpectedly higher severities from adverse selection.
Early stage delinquencies (30-59 days) fell by 27, 8, 16, and 24bp across 06-1 to 07-2.
Historically, seasonal effects on current-to-30 roll rates are significant (+10%) in January.
Thus, lower roll rates in this report imply an improvement in underlying subprime
borrower behavior, an optimistic sign for those Looking for signs of a credit burnout.
Voluntary prepayments were generally lower, with CRR changing by 40, -42, 1, and -91 basis points across 06-1 to 07-2.
Analysts expect medium-term upside from these depressed prepay levels. These speeds include the effect of P&I recapitalizations, which can artificially lessen reported speeds, analysts said.
