Fitch: a Mixed Bag on Subprime MBS

Low rates have led to adverse selection and performance deterioration in 2005 subprime residential MBS while low loan-to-value ratios have limited the prepayment concern for other recent vintages, according to a new report from Fitch Solutions. The company's monthly subprime RMBS index for the 2005 vintage dropped 11.4%. Managing director Thomas Aubrey said this reflects the fact that higher credit quality loans have been able to refinance out of the pool, leaving relatively poorer credit quality mortgages behind. The refinancing has affected the six-month constant prepayment rate for the securities, which over the last three months has risen to 4.3% from 3.5%. Fitch Solutions' Subprime RMBS Price Index, which is based on credit default swaps of RMBS, as a whole registered just under a 10% drop in the most recent month to 7.25 from 8.02. This is due primarily to the 2005 vintage's performance decline.