Subprime Delinquency Rate Growing More Slowly

The subprime-mortgage market still is getting worse each month, but there are some indications that the massive problem of borrowers falling behind on their loans may be moderating. Data provided recently to holders of securities backed by subprime mortgages showed that the number of borrowers who were delinquent on their home loans rose at a slower pace in April than in March. It was the third month in a row in which mortgages went bad at a slower rate. The data come from so-called "remittance reports" that are distributed monthly by trustees of mortgage-backed securities tracked by the widely followed ABX indexes. Among pools of subprime mortgages made in the second half of 2005, the proportion of loans that were more than 60 days delinquent rose by 1.23 percentage points in April to 35.9%. That compared with a 1.61-percentage-point increase in March, a 2.36-point increase in February and a 2.64-point rise in January, according to a report from Wachovia Capital Markets. The report said similar trends were observed in April for loans made in 2006 and the first half of 2007. On average, between 25% and 40% of the subprime loans in these groups are more than 60 days delinquent. While it is hard to predict when the subprime market will hit bottom, some analysts think the recent data indicate that some sort of stabilization is under way. "The trajectory is beginning to flatten out, and this could be a turning point for prices" of mortgage securities, said Glenn Schultz, a senior analyst at Wachovia. As many poorly underwritten subprime loans made between mid-2005 and mid-2007 go bad early in their lives, Mr. Schultz expects the remaining loans to perform more normally. In recent weeks, some portions of the ABX indexes have bounced off their record lows, and traders say some investors are buying subprime bonds again after their market prices dropped to deeply discounted levels. But many market participants remain skeptical or bearish about the outlook for subprime. Richard Parkus, an analyst at Deutsche Bank Securities, says the recent remittance data showed "no clear evidence of any recovery," and his firm continues to expect extraordinarily high levels of losses among subprime loans. Skeptics also say that with home prices falling and unemployment rising, delinquencies will keep climbing. There is also a possibility that the recent delinquency data might have been influenced by seasonal factors, such as individuals using recent tax refunds to become current on their mortgage payments.