Nonprime Performance Deteriorating

That is concerning bond investors who stand to suffer losses if loans are paid off early because of foreclosures, according to the report.

UBS found that the delinquency rate for 2006 vintage subprime deals hit 4 percent, “almost twice as high as the deals issued in the first quarter of 2004 (and) 2005.”

“We are beginning to see the first signs that mortgage credit is slipping,” UBS said in the report, which was reviewed by MortgageDaily.com.

“The subprime borrowers are more stretched financially, as evidenced by lower credit scores, smaller loan size (cheaper homes), … etc,” UBS said. “The subprime credit tends to be more levered, both toward the housing market and the economy.

“Even during the robust housing market of the past decade, when overall mortgage credit performance have been the envy of other sectors, performance of subprime deals have lagged versus that of prime and Alt-A deals,” the firm said.

UBS found that for every Alt-A product type, the delinquency rates of 2006 vintage are higher than earlier loans at comparable seasoning.

During the past year the subprime delinquency rate increased by 60 percent; by comparison, the Alt-A delinquency rate increased by 35 percent during the same period, UBS found.

“Mortgage performance headed south at the same time when housing market slowed down,” UBS said. “The deterioration in subprime performance led the way, both in dollar terms and percentage terms.”

Doug Duncan, chief economist for the Mortgage Bankers Association, said in a statement that a continued softening in the economy would lead to more delinquencies and foreclosures in the subprime market.

“A number of factors including the aging of the loan portfolio, increasing short-term interest rates, and high energy prices have been putting upward pressure on delinquency rates,” Duncan said. “To this point, generally healthy economic growth and labor markets have kept delinquency rates from rising. However, we are seeing increases in delinquency rates for subprime loans, particularly for subprime ARMs. It is not surprising that subprime borrowers are more susceptible to these changes.

“Going forward we expect some further slowing in the economy and the housing market,” he said. “As a result, we will see modest increases in delinquency and foreclosure rates in the quarters ahead.”