A Fitch Solutions report Friday shows the summer rally in U.S. subprime credit default swaps ended abruptly in August when most performance trends were negative and only an improvement in certain modifications seemed hopeful.
According to the report, prices on U.S. subprime CDS dropped 1.6% during the month to the lowest level since March, while the 2007 vintage plummeted 18.8%.
But the report noted that, thanks to the lingering effects of a rally in the first quarter, year-to-date prices are still up 12.1%.
The August decline appears to have been not quite as sharp as the one caused by the market's troubles digesting the Fed's Maiden Lane auction earlier this year.
"This past month's decline of 1.6% is slightly less than the one observed in June of this year, when subpar Maiden Lane auction results drove subprime CDS prices down 1.8%," Fitch director David Austerweil told this publication, when asked how comparable the two notable declines seen this year were.
Austerweil said in the report that reduced expectations for U.S. economic growth and the implications of this for housing may have contributed to the August decline.
He said delinquencies experienced notable increases in every vintage during the month. The current-to-delinquent roll rate jumped 8.8% month-to-month.
Also subprime loans are not becoming real estate owned and liquidated fast enough to reduce their balances, Fitch senior director Alexander Reyngold noted in the report.
For example, of the 12.8% of 90-day delinquent loans in the 2006 vintage that entered foreclosure in August, only 2.1% of these foreclosed homes became real estate owned.
Two positives during the month were an increase in modifications that affect loan balances and signs that these modifications are becoming more effective, according to the report.
"Principal reductions have risen significantly in 2011 [and] are clearly becoming more effective for mortgage loan borrowers," Austerweil said.
Modifications of this type were used for 5% of 2007 vintage loans, for example, representing an increase of almost 80% year-to-date. The percentage of these modified loans that subsequently become 60-or-more days delinquent has fallen by 24.6% year-to-date.
