Sept. 26 (Bloomberg) -- Late payments and defaults among subprime mortgages packaged into bonds rose last month, according to data for loans underlying benchmark ABX derivative indexes.

After August payments, 19.1 percent of loan balances in 20 deals from the second half of 2005 were at least 60 days late, in foreclosure, subject to borrower bankruptcy or backed by seized property, up from 17.5 percent a month earlier, according to a report yesterday from Wachovia Corp.

Prepayment speeds for the loans slowed, suggesting it's more difficult for borrowers to sell their homes or refinance, according to another report by New York-based analysts at UBS AG. Record levels of delinquencies and defaults on subprime mortgages are worsening as home prices decline and interest rates on loans adjust higher for the first time. As lenders tighten standards, borrowers are finding it harder to refinance into new mortgages with lower payments.

The ``reports showed the first inkling of the impact of shutdown of subprime market,'' the UBS analysts led by Thomas Zimmerman wrote late yesterday. ``In our opinion, the full impact is yet to come.''

Analysts and investors track the performance of mortgages in bonds by looking at figures that bond trustees typically release on the 25th of each month. Investors use ABX indexes to track the subprime-bond market. The indexes tumbled this year as investors expected rising defaults on home loans to continue, causing payments on the bonds they're in to end.

Subprime loans are made to borrowers with poor credit or high levels of debt. About $1.2 trillion of the loans are outstanding, according to Moody's Investors Service.

Buyer Protection

The ABX indexes indicate prices for credit-default swaps linked to 20 bonds. The swaps offer payments to buyers of protection if the securities aren't repaid as expected, in return for regular insurance-like payments. Derivatives are financial instruments used to hedge risks or for speculation.

Most ABX indexes rallied this morning in New York, suggesting investors may have found the reports were better than they expected. Analysts at Merrill Lynch & Co. wrote in a report yesterday that while the delinquency and default numbers were in line with predictions, prepayments didn't slow as much as ``some market participants believed'' they would.

The ABX.HE.A 06-1, linked to A rated bonds from the second half of 2005, rose 4.4 percent to 85.06, according to Markit Group, the London-based administrator. An index linked to bonds rated BBB- from the deals rose less than 1 percent, to 51.28.

For bond deals from the second half of last year underlying ABX indexes, the share of loans reported to be at least 60 days delinquent or worse rose to 16.38 percent in August, from 14.36 percent in July, according to Charlotte, North Carolina-based Wachovia.

Lender Shutdowns

The increases are ``not necessarily surprising,'' because of the tighter conditions in the mortgage market, Wachovia analysts led by Glenn Schultz and John McElravey wrote in a report yesterday. The amount of losses actually realized after foreclosures ``jumped'' for a number of deals, they said.

Since the start of 2006, at least 110 mortgage companies have closed operations or been sold. Other home lenders have tightened terms or dropped subprime programs completely, such as Calabasas, California-based Countrywide Financial Corp., the largest U.S. mortgage company.

About 100,000 subprime mortgages a month will reset to higher rates for the first time during the next two years, according to UBS. More than 80 percent of the loans from 2005 and 2006 had adjustable rates, according to Credit Suisse Group.

`Teaser' Period

Rates of typical subprime mortgages rise 3 percentage points after an initial two-year ``teaser'' period, and may increase more after that depending on the level of rate benchmarks.

Mortgage delinquencies tend to rise for the first few years after the loans are made, so increases aren't automatically bad for bond investors. Holders of investment-grade bonds created in securitizations of mortgages are protected against loan losses below the expectations that ratings firms use in assessing them.

The share of all subprime balances in bonds with payments at least 90 days late, in foreclosure or backed by seized property was the highest on record in June, according to Friedman Billings Ramsey Group Inc. The rate more than doubled from a year earlier to 13.43 percent, according to the Arlington, Virginia-based securities firm's calculations based on data by First America Corp.'s LoanPerformance unit.

Between $100 billion and $200 billion of ABX contracts tied to BBB+, BBB, and BBB- bonds are outstanding, according to an estimate from a presentation that Paulson & Co. made in a June meeting organized by a derivatives trade group. The New York- based hedge-fund manager was seeking to change some contract language after betting on defaults.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

Last Updated: September 26, 2007 17:20 EDT