While defaults and delinquencies on subprime mortgages appear to have peaked, losses on prime mortgages and other prime collateral referenced by asset-backed securities (ABS), such as auto loans and credit cards, are expected to keep rising.An analysis by Connecticut-based risk and capital markets consultant Clayton has found that, while subprime mortgage delinquencies peaked in December 2007, delinquencies and foreclosures on Alt-A loans are some distance from topping out. Clayton estimates adjustable-rate Alt-A mortgages will not see monthly interest rate changes peak until September to December 2009. It is sharp adjustments of interest rates from initial fixed 'teaser rates' to a prohibitively high overall interest rate for the rest of the mortgage term that has driven so many mortgages into foreclosure in the past two years. Beyond mortgages, delinquencies and annualised net losses (ANL) on both prime and subprime US auto loan asset-backed securities (ABS) climbed in July, and are expected to worsen during the remainder of the year, according to the latest analysis by Fitch Ratings. ANL on prime auto ABS in July hit 1.42%, a 15% increase on losses recorded in June and a 94% increase on July 2007. Delinquencies rose to 0.71% for July, a 14.5% increase on the previous month and 37% higher than the same period a year ago. ANL on subprime auto ABS were also markedly higher in July, climbing to 6.56%, a 16.5% increase over June and 45% higher than July 2007. Delinquencies spiked 11% from June to July to reach 3.63%, a 30% rise on July the previous year. Fitch’s auto ABS performance indexes track $65.2 billion of US auto ABS, of which 69% is prime and the remaining 31% subprime. The ratings agency said it “remains unconvinced the market will improve structurally in the short term. The wholesale vehicle market remains soft, with considerable weakness in the truck segment, along with lower recovery rates in the luxury vehicle space”. Expectations are similarly grim for credit card ABS, with JP Morgan analysts reporting that spreads on credit card ABS of different ratings and maturities rose by between 10-50 basis points during the last week in August alone. More notably, five-year credit card ABS rated AAA rose 15bp over the same period. Widening spreads were also reported by other credit card issuers, such as American Express, which pointed to ongoing fears of the weakening economy affecting consumers' ability to meet their debt obligations. However, a recent study by Standard & Poor's (S&P) concluded the recent widening of spreads on credit card ABS might not accurately reflect the default risk of the underlying collateral. S&P, using model-generated implied default rates, found the perceived credit risk of credit card ABS, while high for the past 12 months compared with 2000 to 2006 in light of the actual performance of credit card ABS collateral, was “excessively high when we consider the historical stability of prime credit card ABS". The study suggested two explanations: that the market does indeed expect substantial declines in collateral performance for these securities “which falls short of explaining the entire picture", or that the implied default rates reflect factors beside default and issuer risk, “most notably, the pricing impact of the credit default swap markets and liquidity concerns,” S&P analysts noted. See also: ABS new issuance increases 158%
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