Only $9 billion in subprime mortgage-backed securities were issued in August, and the credit enhancement on at least one adjustable-rate securitization exceeded 40%, according to a Friedman Billings Ramsay report."We observed credit enhancement of the AAA rated classes of an adjustable rate subprime RMBS, from a first tier issuer, as high as 41.25%," FBR managing director Michael Youngblood said. Credit enhancements were much lower when $42.1 billion in subprime residential MBS were issued in August 2006. "We believe that such lofty credit enhancement should lead to more conservative underwriting of non-agency mortgage loans and to equally lofty non-conforming mortgage rates, and both will curtail borrower demand and hence the volume of new mortgage loans and RMBS," the FBR researcher says in the report. FBR researchers recently reported that the default rate on subprime loans stood at 13.43% in June. They are now forecasting that defaults will rise to 16.11% by June 2008. (The default rate includes loans 90 days or more past due, in foreclosure and real estate owned.)

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