Q2 RMBS Volume 2nd Highest Ever

Standard & Poor’s released Wednesday Trends in U.S. Residential Mortgage Products: Subprime Sector Second-Quarter 2006.

Subprime securities rated by S&P were $123.0 billion during the period, up 16 percent from the first quarter and 8 percent above the year-ago second quarter, according to the report. The rated volume is the second-highest ever, behind the all-time high of $138.8 billion in the fourth quarter last year.

For the first time in a year and half, the average subprime loan balance reportedly decreased — to $184,790 from the first quarter’s $189,276.

Purchase loans accounted for 43 percent of the issuance volume, down from 45 percent in the prior quarter.

Just over half of loans were used for cashout edging up from the prior period, S&P said. Meanwhile, the overall share of rate-term refinance loans rose — for the first time since the third quarter 2003 — to 5.1 percent from 4.5 percent in the first quarter, noting some of the increase was due to 2/28 adjustable-rate mortgages originated two years ago that were up for reset in the quarter.

“The trends seem to show the effects of a slowing housing market and rising interest rates, even with subprime borrowers who typically do not opt for rate-term refinancing,” S&P said in the report.

Second liens in subprime deals during the quarter were 4.2 percent, an increase from both 3.5 percent in the prior three-month period and only 2.3 percent in the comparable period 2005. About one-third of the loans closed with a simultaneous second attached edging down from the first quarter.

One of the most significant differences observed in the most recent quarter was the popularity growth of 40-year and greater amortization, S&P said, adding that “it is quite clear” these loans are becoming the affordability product of choice for subprime borrowers. Their share of total issuance rose 10 percent within the quarter to over 25 percent.

Balloon loans, which are usually in 40-year products, rose to a record of nearly 4 percent of total subprime issuance from less than 3 percent in the first quarter, the report said.

Meanwhile, interest-only loan issuance fell to 18 percent from over 25% in the previous three quarters, S&P reported.

The average FICO score dropped to 623 — the lowest level since the last quarter of 2004, S&P said, citing the shift to 40-year from IO loans as the cause. FICO scores for 40-year loans dropped significantly over the same period to 624, while for IO loans remained relatively constant at 653.

Credit enhancement levels rose significantly to 22.8 percent from 19.8 percent in the prior period for fixed-rate loans at the ‘AAA’ level, “a trend mostly driven by a drop in FICO scores as lenders move away from IO products,” S&P said. ARMs, which also had decreased scores, saw similar credit enhancement increases. The only credit enhancement downturn, a modest 0.3 percent, at the ‘AAA’ level was for hybrid ARMs, which had an increase in average FICO score and “is probably associated with tighter underwriting guidelines for borrowers seeking IO products.”