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Fitch: Three Month Rally Sends Sub-prime Credit Default Swaps Index to Highest Levels Since 2008

Feb 22, 2011

Fitch Solutions has reported that prices for sub-prime credit default swaps (CDS) rose for the third consecutive month, as the outlook for market conditions remains positive for further price increases. This is attributed to favorable market conditions thanks to lower defaults rates, deliquency rates and prepament rates.  The index increases 5.2 percent in February 2011 following a 7.2 percent increase in January 2011. This is the highest level for the index since October 2008 at 11.37. Helping push prices for CDOs higher is a seven percent-plus returns being seen on both the 2007 vintage and the 2004 vintage. This is inspite of a constant default rates (CDRs) average 20 percent higher for the 2007 vintage. "Declining default rates, delinquency rates, and prepayment rates with increasing market risk appetite are delivering a powerful boost to subprime asset prices," said Author and Director David Austerweil. "The recent sharp rise in mortgage rates has been accompanied by a significant decline in constant prepayment rates." January 2011's loan level data confirmed a declining trend in delinquency rates with significant drops in the 60-day delinquency rate across vintages. "The decline in 60-day delinquencies was substantial for the 2007 vintage and it is now—30 percent lower on a year-on-year basis," said Senior Director Alexander Reyngold. "If recent delinquency trends indicate that most troubled borrowers are already in foreclosure or have had successful loan modifications, delinquency rates should continue to decline." Fitch points out that the largest risk to subprime index prices going forward is from increased severities due to further potential residential home price declines and the large inventory of foreclosed homes. For more information, visit
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