FBR: B&C Defaults May Fall.(Friedman Billings Ramsey - Michael Youngblood )

WASHINGTON -- Despite jitters about the housing market and resets of adjustable-rate mortgages, researchers at one securities firm are bravely forecasting a slight decline in the default rates for subprime mortgages by midyear 2007.

Friedman Billings Ramsey managing director Michael Youngblood is projecting that defaults on subprime loans will edge down to 6.45% by June 2007 - after rising during the previous 12 months from 5.5% to 6.9% as of June 30.

However, he is concerned the refinancing of subprime loans in 2007 could go badly if the yield curve does not remain flat.

Mr. Youngblood's optimistic forecast is based on a healthy job market and gains in wages, which means more subprime borrowers have jobs and they are earning more than a year ago. "The underlying fundamentals are very helpful for subprime," according to the managing director of research for asset-backed securities.

He also expects defaults in the Gulf Coast states will continue to decline thanks to special grants of up to $150,000 to homeowners whose homes were damaged by Hurricanes Katrina and Rita.

The default rate in New Orleans has fallen from 49% in December to 22% in June. Before Katrina, New Orleans had a default rate under 9%. FBR researchers define defaults as loans 90 days or more past due, foreclosures and real estate-owned.

Layoffs in the auto industry also contributed to rising defaults over the past year. "We believe those are settling down," Mr. Youngblood said. So far, the reset process on ...