ARM Prepayments Rise; Delinquency Picture Is Mixed

Prepayments of subprime fixed-rate and adjustable-rate residential mortgage-backed securities increased slightly in July from the prior month, according to a Friedman Billings Ramsey report.

Furthermore, Friedman Billings Ramsey's "Subprime RMBS Performance in July 2005: Prepayments and Delinquencies" report found that serious delinquencies (90 days or longer, foreclosures and real estate-owned) of most subprime RMBS showed mixed results in July from the prior month.

In the period 2001 to 2004, prepayments of fixed-rate subprime RMBS originated increased slightly from June to July. RMBS originated in 2000 and 2005 fell slightly over the same midyear period. Also, prepayments of adjustable-rate subprime RMBS increased modestly in every origination year in July.

Prepared by Friedman Billings Ramsey managing director of asset-backed securities research, Michael D. Youngblood, the report suggests that low cumulative loss rates continue to be an attribute among subprime RMBS. FBR finds that "the prevailing market conditions, notably low mortgage rates, improving labor markets and brisk house price appreciation have substantially benefited borrowers and served to enhance overall credit performance of subprime RMBS."

In addition, one-month prepayments of the fixed-rate RMBS issued by Aames, Countrywide, Delta, New Century, Equity One, Ameriquest and Saxon showed significant differences from average prepayment behavior for the 2002-03 origination years but were generally in line with the market average for 2004.

Prepayments of adjustable-rate securities displayed mixed results. Serious delinquency rates of both the fixed-rate subprime RMBS and the adjustable-rate subprime RMBS varied significantly at every origination year and by issuer. Serious delinquencies of fixed-rate subprime RMBS declined, on average, in July from the prior month in almost every origination year.

Meanwhile, serious delinquencies of adjustable-rate subprime RMBS increased slightly for the 2002-05 origination years but fell slightly for the 2000-01 origination years.

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