The performance of adjustable-rate subprime mortgages originated in 2006 is rapidly deteriorating and "higher default and loss rates may ensue," according to researchers at Friedman, Billings, Ramsey & Co.The default rate on 2006 subprime ARMs jumped 27% in November to 3.21% while the default rate on loans originated in 2005 hit 6.49%. The FBR researchers noted that the 2006 vintage has a higher interest rate (8.20%) than 2005 loans (7.36%), which implies that 2006 borrowers have higher debt service burdens. "It appears that subprime lenders may have mended their tattered profitability in 2006 by originating loans with higher mortgage rates, perhaps to riskier borrowers," the FBR report says. Based on preliminary volume data, the Arlington, Va.-based investment banking firm is reporting that issuance of non-agency subprime MBS fell 12.3% in 2006 to $521.3 billion, down from $594.4 billion in the previous year. However, alternative-A MBS issuance jumped 12.5% to $299.9 billion.

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