Feb. 26 (Bloomberg) -- The perceived risk of owning low- rated subprime mortgage bonds rose for a seventh day as the latest monthly reports on loan performance began to be released, according to an index of credit-default swaps on 20 securities rated BBB- and created in the second half of 2006.

The ABX-HE-BBB- 07-1 index fell 1.8 percent to 67.27, and has fallen more than 30 percent since trading started Jan. 18, according to Markit Group Ltd. The level of the index means an investor would pay more than $1.6 million a year to protect $10 million of bonds against default, according to Deutsche Bank AG, up from $389,000 initially. The index rose in early trading.

Monthly performance data on subprime mortgage securities is being released today by trustees of various bond deals. For one bond issued in October by Santa Monica, California-based Fremont General Corp. and part of the index, borrowers were at least one payment behind on 7.4 percent of loan balances on Jan. 31, up from 6.4 percent in the previous report. Delinquencies and defaults on home loan typically rise in the first few years.

The rate of increases in reported delinquencies on many deals tied to ABX indexes ``failed to match worst-case expectations of market-scarred participants used to a typical post-holiday hangover'' among the borrowers, said Daniel Nigro, an asset-baked securities portfolio manager in New York at Dynamic Credit Partners. The firm manages about $6 billion.

NovaStar, Impac

The index has fallen to a record low. Some investors have used it to bet the housing slump will worsen and that losses at lenders focused on the riskiest borrowers will continue. Last week, Kansas City, Missouri-based NovaStar Financial Inc. and Impac Mortgage Holdings Inc., a Newport Beach, California-based lender that focuses on loans that are less risky than ones labeled as subprime, reported fourth-quarter losses.

Yield premiums, or spreads, over benchmarks on typical BBB- classes of subprime mortgage securitizations widened about 1.75 percentage points in the last two weeks to 4.75 percentage points, according to Peter DiMartino, asset-backed securities strategist at RBS Greenwich Capital in Greenwich, Connecticut.

The desire by investors for more yield on subprime mortgage bonds will further hurt lenders by depressing prices for their loans, Bose George, an analyst at securities firm Keefe Bruyette & Woods in New York, wrote in a report today.

`Weak Prices'

``The recent widening of spreads is contributing to weak prices in the secondary market and further widening could exacerbate the situation,'' George said.

He said today that New Century Financial Corp., the second largest subprime lender by new volume, will lose money this year. Shares of Irvine, California-based New Century fell 1.7 percent today to $15.26 at 13:39 p.m. in New York Stock Exchange composite trading. The shares are down 52 percent this year.

The ABX-HE-BBB- 07-1 fell 17 percent last week, and similar indexes based on older bonds had similar drops, as Moody's Investors Service said it may cut the servicing ratings of five subprime lenders, saying their financial difficulties could hurt their proficiency in collecting payments.

Tighter spreads between the prices at which investors today could buy and sell various ABX contracts from dealers than last week indicated there was a more even split among investors looking to buy and sell protection, Andrew Chow, who manages $6 billion in asset-backed bonds and their derivatives at SCM Advisors LLC in San Francisco, said in an interview.

``Whether that holds for more than a day, your guess is as good as mine,'' he said.

Credit-default swaps on mortgage bonds offer payments to buyers of protection if the securities aren't repaid as expected. Protection sellers are provided upfront and monthly payments.

New series of ABX indexes are created every six months by securities firms including Deutsche Bank, and Goldman Sachs Group Inc., and London-based Markit. They indicate prices for default swaps linked to 20 bonds, not prices for swaps on each.

Higher Rates

Subprime mortgages are given to people with poor or limited credit records or high debt burdens and typically have rates at least two or three percentage points above safer prime loans. They made up about a fifth of all new mortgages last year, according to the Washington-based Mortgage Bankers Association.

About 2 percent subprime mortgages made last year were more 60 days late after five months, nearly twice the rate for ones made in 2005, and the worst rate in at least seven years, according to a Feb. 22 report from Barclays Capital.

About $824 billion in securitized subprime mortgages are outstanding, representing about 11 percent of total U.S. mortgage debt, according to a Feb. 23 report by Credit Suisse Group.

Alt A loans are defined as ones that fall only slightly short of the credit standards of Fannie Mae and Freddie Mac, the two largest U.S. mortgage companies. They often involve loans made with less proof of borrowers' pay, purchases of homes by investors or interest-only loans and ``option'' adjustable-rate mortgages, whose payments can fail to cover the interest owed.

About $722 billion of securitized Alt A mortgages are outstanding, or about 9.3 percent of total U.S. mortgage debt, according to Credit Suisse. Alt A mortgages made last are also performing much worse than ones made in other recent years, according to David Liu, an analyst at UBS AG.

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

Last Updated: February 26, 2007 16:55 EST