Subprime loan performance stabilizes, caution urged

NEW YORK (Reuters) - The performance of subprime mortgage loans pooled into U.S asset-backed securities showed signs of stabilizing in April, although analysts signal caution ahead.

Remittance reports, which provide a snapshot of subprime loan performance over the last 30 days, showed the pace of delinquencies slowed from the sharp climb in previous months, snapping a long period of pronounced deterioration.

Poor underwriting standards on home loans made to borrowers with weak credit histories over recent years led to soaring delinquencies and defaults on the risky loans.

Remittance reports, issued monthly on the 25th, are closely watched because they allow market participants to track the credit performance of subprime mortgage loans supporting the ABX index. ABX, a synthetic index of home equity asset-backed securities tied to credit default swaps, is comprised of the risky home loans.

Delinquencies on mortgage loans of 60 days or more, which support the ABX 06-1, 06-2, 07-1 and 07-2 indexes, rose by 122, 191, 130 and 168 basis points, respectively in April, slowing the pace from March's increases of 160, 221, 140 and 204 basis points, analysts said.

Despite this month's improved report, analysts caution seasonal factors may have come into play.

"The deceleration is partly attributable to seasonality (tax refunds), but is nevertheless a fairly significant slowdown," said Chris Flanagan, analyst at JPMorgan Securities.

According to Barclays Capital, the number of bankruptcies, foreclosures, and real estate-owned properties posted increases across all index series in April, offsetting some of the improvement in delinquencies.

"Given the historical seasonal pattern of significant percentage change improvements in 30- and 60-day delinquencies in April, we believe the latest report portends additional collateral performance deterioration over the next several months," the firm said.

Cumulative losses on the risky home loans that support the series of ABX indexes continue to rise.

In April, the ABX 06-1 increased 29 basis points to 2.24 percent while the 06-2 series rose 32 basis points to 2.52 percent. ABX 07-1 cumulative losses climbed by 43 basis points to 1.80 percent while the 07-2 series rose 26 basis points to 1.01 percent in April.

Flanagan expects the level of monthly losses in the ABX 07-1 index, which is linked to subprime loans made in 2006's second half, to experience a further reduction in credit support. "For ABX 07-1, that level of monthly losses will easily exceed available excess spread and reduce overcollateralization," the analyst said.

He noted that 413 tranches across the 80 deals in the ABX indexes are currently rated "CCC" or lower by Standard & Poor's and may be faced with default.

"This translates to 33 percent of all outstanding bonds across ABX reference entities are in imminent default. Even bonds originally in the 'AA' category have fallen to 'CCC' or lower," said Flanagan.

(Reporting by Nancy Leinfuss; Editing by James Dalgleish)