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Subprime Mortgage Delinquencies Show `Positive Shift,' RBS Says

The proportion of U.S. homeowners turning delinquent on mortgages backing the securities that roiled the global financial system has tumbled in the past three months, even after accounting for a typical seasonal improvement, according to RBS Securities Inc.

Of borrowers with subprime loans in 2007-issued bonds who had never missed payments, an average of 2.6 percent fell behind each month, a drop from 3.7 percent in February, representing a 15 percent decline after seasonal adjustments, according to RBS Securities analysts.

“We believe that the last few months’ performance points to a fundamentally positive shift in borrower behavior,” Paul Jablansky, Desmond Macauley and Ying Wang, analysts at the Stamford, Connecticut-based unit of Royal Bank of Scotland Plc, wrote in a June 8 report. If sustained, the trend can “substantially increase the attractiveness” of related bonds, they said.

Slowing delinquencies on risky mortgages have helped boost prices this year for related securities without government- backed guarantees, as the U.S. employment market shows signs of stabilizing and the transactions experience what Barclays Plc analysts term “credit burnout,” or a flushing of the weakest borrowers from the pools through defaults.

The trend may be the first step in a lessening of pressure from distressed-property sales in the U.S. housing market, which real-estate-data firm Radar Logic Inc. said in a report today is likely to experience a “second dip” in prices to new lows after they stabilized last year following record declines.

Home Seizures

The monthly rate of new delinquencies among all loans in non-agency mortgage bonds fell to 1.2 percent as of May reports from trustees, covering payments due in April, according to Austin, Texas-based Amherst Securities Group LP. That’s the low since 2007, down from more than 2.5 percent early last year.

On an absolute basis, new delinquencies also declined in early 2009, before rising later last year, reflecting the typical seasonal pattern partly related to income-tax refunds and winter holiday spending.

Lenders seized a record 93,777 homes in May, up 44 percent from a year earlier, after the pace slowed amid government- encouraged efforts to rework debt, new state foreclosure rules and a flood of defaults hitting courts and loan-servicing departments, Irvine, California-based data company RealtyTrac Inc. said today.

“There are still almost 5 million loans more than 90 days past due,” New York-based Radar Logic said in an e-mailed note. “As these mortgages move through the foreclosure process -- slowly, for now, but perhaps more rapidly in the near future -- the inventory of bank-owned homes is going to increase, barring a significant increase in the rate at which banks liquidate” seized homes.

Swaps Rise

More than 27.4 percent of mortgages underlying the $1.5 trillion of non-agency securities were at least 60 days late, in foreclosure or already turned into seized property as of April bond reports, up from 27.2 percent in January and 22.5 percent a year earlier, according to data compiled by Bloomberg.

The level peaked at 27.9 percent in February. Another 3.14 percent of loans were 30 days late as of the April bond reports, a two-year low and down from a record 4.3 percent in December 2008. Among just subprime mortgages, a total of 43.3 percent were delinquent or defaulted, the data show.

TCW Group Inc., which oversees about $115 billion, is among investors that think non-agency mortgage bonds are “extremely cheap on a relative basis” because of the improving borrower performance, Bryan Whalen, co-head of the Los Angeles-based asset manager’s mortgage- and asset-backed bond group, said. He’s buying securities where “bad borrowers have been leaving the pools at a quicker rate than good borrowers can refi.”

Looming Defaults

A Markit ABX index of credit-default swaps tied to 20 subprime-loan bonds rated AAA when created in the first half of 2007 has climbed 16.9 percent this year to 40.25 yesterday, according to London-based administrator Markit Group Ltd. Higher ABX index levels generally indicate less pessimism about the bonds’ values.

The ABX.HE.AAA.07-2 index, which trades at levels similar to the prices of the underlying securities in cents on the dollar, rose to 46.75 on May 3, the highest since October 2008, after falling to as low as 23.1 in April 2009, from 100 in 2007.

Almost a quarter of U.S. mortgage borrowers owed more than their homes were worth in the first quarter, a situation that may eventually prompt homeowners who haven’t been delinquent to default, according to data compiled by Seattle-based Zillow.com.

Jumbo Loans

About 23 percent of Americans believe defaulting on a so- called underwater mortgage is justifiable, according to the results of a survey by Silver Spring, Maryland-based National Foundation for Credit Counseling released June 8.

Subprime mortgages were given to borrowers with poor credit or high debt.

Data on prime-jumbo mortgages in non-agency securities haven’t suggested the same improvement as seen with subprime debt, according to analysts including those at RBS and Credit Suisse Group. For instance, the amount of loans 30-to-60 days late among adjustable-rate jumbo mortgages in bonds created in the second half of 2006 climbed to 2.5 percent in May, from 2.2 percent the previous month, according to a Credit Suisse report last month.

Jumbo mortgages are larger than government-supported Fannie Mae and Freddie Mac can finance, currently from $417,000 to $729,750 in high-cost areas.

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

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