May Subprime Data Likely to Show Continued Improvement

by: Tom Brown

We’ve argued here for months that the leading indicators of changes in subprime mortgage credit quality are showing signs of improvement. And we’ve argued, too, that if said improvement continues, many estimates of cumulative subprime losses lately being bandied about, particularly the estimates being used by the rating agencies, will prove to be much too high.

The leading indicators in question are: a) the amount of newly delinquent loans, and b) the rate at which delinquent loans roll from early-stage delinquency buckets to later-stage bucket—so-called “roll rates.” Both metrics have been improving all year, the former more so than the latter.  

Initially, most observers assumed the improvement was merely seasonal (consumer finances tend to improve during the early part of the year, as tax refunds arrive). But the loan servicer reports for April and May both showed improvement, as well, a sign that something more than just seasonality is going on.

Hold on a minute!, you’re yelling—assuming you’re a mortgage geek. May showed improvement? How the heck do I know that? The May data won’t be available until the servicer reports are published on June 25—today.  

The servicer reports aren’t out yet. But other data is, that we believe gives us an awfully accurate preview of how the May numbers will look. It comes from Clayton Holdings Inc., a credit surveillance company that regularly monitors a huge portion—like, 40%—of outstanding subprime mortgage loans that have been securitized.  The Clayton data thus provides a good prediction of what will be in the more-widely-watched servicer reports, due out shortly.

And as I say, they show that the early-year improvement has continued well past the point it can be chalked up just to seasonality. I’ve chosen to look just at the performance of subprime loans originated in 2006 and 2007, since those loans are the most problematic, and because earlier vintages are already showing signs of sustained improvement. The results are below.  Chart 1 shows that, of loans originated in 2006, 3% of performing loan balances fell behind by one payment in May. This is the fifth straight monthly decline in the rate of new delinquencies; it’s now at its lowest level since March 2007.


For the 2007 vintage, the inflow rate rose by 10 basis points in May. But that compares with a 40 bp sequential increase in May of 2007. (Also, keep in mind that 2007 originations are only one-third the size of 2006’s.) 

Chart 2 is the percentage of the original balance of loans originated that are now 61-90 days past due, Chart 3 the percent 91 days past due, but where foreclosure notices haven’t been issued, and Chart 4 the percent of original balances that are in the foreclosure process. Take a look:

 


 

March is typically the seasonal best point for credit quality. Table 1, below, shows the change in delinquent balances between March and May this year, compared to changes over the same period in 2007. As you can see, 2006 vintage performance is clearly improving, while the 2007 vintage is deteriorating at a much slower rate.

Clayton Holdings Subprime Mortgage Surveillance Data
March-to-May Change in Delinquencies,
as a Percent of Original Balance

 

30-to-60 Day

61-to-90 Day

Over 90 Day

Vintage

2007

2008

2007

2008

2007

2008

2006

0.50%

-0.30%

0.20%

-0.20%

0.40%

-0.10%

2007

0.90%

0.10%

0.70%

0.10%

0.50%

0.10%

Source: Clayton Holdings

 

 

 

 

Click to enlarge

 All the servicer reports will be released shortly, for the world to see. But based on what we see in the Clayton numbers, the servicer data will provide more encouraging news about the magnitude of future subprime mortgage losses.

Tom Brown is head of BankStocks.com.