The 2006 subprime collateral is shaping up to be one of the worst vintages ever.
Considering delinquencies, defaults and losses, the vintage is running neck-and-neck with collateral originated during 2000, considered to be the reigning champion of poor performance, said David Liu, MBS strategist at UBS.
Delinquencies this year have hit 3.87%, compared with 3.27% in 2000. Delinquencies have also gone up quicker than previous years. The 2006 vintage ABS are the first in at least several years to be put on watch for downgrade the same year they were issued (SN, 11/20). Liu pointed to weaker underwriting, increased risk layering, weakening home price appreciation and slowing prepayments as causes of weakness.
On the other hand, the ’06 vintage has a number of factors in its favor. The Vintage benefits from larger loan sizes and higher FICO scores, better macroeconomic conditions and financially stronger servicers due to consolidation. Just as many loans originated in 2000 were prevented from becoming losses by the refinance wave of subsequent years, the chances of lower interest rates and another wave of refi activity cannot be absolutely ruled out, Liu said.