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Alt-A Ratings Continue to be Slammed

Recent MBS ratings activity

January 17, 2008


photo of Coco Salazar

As the assault on Alt-A ratings continued, negative actions accelerated on commercial deals.

Since Monday, Moody's Investors Service announced negative ratings actions on 66 Alt-A deals issued in 2007 due to higher-than-expected rates of delinquency, foreclosure, and real estate owned in underlying collateral relative to credit enhancement levels, as well as updated methodology on non-delinquent portions.

Twenty of the deals were primarily backed by first lien, Alt-A loans. Nine transactions issued by Morgan Stanley Mortgage Loan Trust saw 46 tranches downgraded and 32 placed on review for potential downgrades, five Credit Suisse deals had 27 class ratings lowered and 10 classes facing possible downgrade, five deals by Residential Accredit Loans Inc. saw worse ratings on 17 tranches and potential downgrades on a dozen classes, and MortgageIT Securities Corp. Mortgage Loan Trust, Series 2007-1, saw six tranches downgraded and three facing lower ratings.

Forty-six of the transactions were backed by option adjustable-rate Alt-A loans. The top four contributors were 10 deals by RALI that saw downgrades on 25 tranches and potential lower ratings on one tranche, eight Countrywide transactions with 25 tranches downgraded and six facing lower ratings, five Bear Stearns Mortgage Funding Trust deals that had 24 tranches downgraded and seven placed on negative review, and five HarborView Mortgage Loan Trust deals with 18 tranches downgraded and two facing potential downgrade.

The remaining 18 option ARM, Alt-A deals included four American Home deals that saw 16 classes downgraded and five facing possible downgrade, three Structured Asset Mortgage Investments II Trust deals with worse ratings on 18 classes and potential downgrades on 13 tranches, and three GreenPoint Mortgage Funding Trust deals with downgrades on 11 tranches. Meanwhile, two Lehman XS Trust had five tranches downgraded, two MASTR Adjustable Rate Mortgages Trust deals saw seven tranches downgraded and five facing lower ratings, and two Luminent Mortgage Trust transactions had six tranches downgraded and four facing possible lower ratings. DSLA Mortgage Loan Trust 2007-AR1 had class M-9 downgraded and CWALT Inc., series 2007-AL1, had ratings of 10 tranches placed on review for possible downgrade.

RALI also saw $645 million in ratings downgrades by Fitch Ratings on 19 first lien, fixed-rate Alt-A deals it issued in 2005 through 2007. Additionally, Fitch said it placed $85 million worth of the deals on Rating Watch Negative. The actions reflected deterioration in the relationship between credit enhancement and loss expectation.

In commercial mortgage-backed securities actions, Fitch said it downgraded nearly $23 million of Credit Suisse First Boston's commercial mortgage pass-through certificates, series 2001-CK3 partly because of projected losses on a loan that transferred to special servicing due to nonpayment default.

Meanwhile, GE Capital Commercial Mortgage Corp., series 2000-1, saw downgrades on three classes worth over $16 million because of increased loss expectations on the current specially-serviced loan and potential future defaults, Fitch said.

Moody's said it downgraded the ratings of close to $20 million but upgraded over $66 million of Salomon Brothers Mortgage Securities VII, Inc., Commercial Mortgage Pass-Through Certificates, Series 2000-C2. Two classes received lower ratings as a result of realized and expected losses from specially-serviced loans, while four classes had ratings raised due to increased credit support, defeasance and stable overall pool performance.

Upgrades were also reportedly issued by Moody's on six classes worth $126 million of Credit Suisse First Boston Mortgage Securities Corp., Series 2001-CK1, due to defeasance, loan pay downs and improved loan performance. The ratings agency said its loan-to-value ratio for the conduit component is about 81 percent, compared to nearly 91 percent at the last full review in October 2006 and 85 percent at securitization.

Increased subordination levels, defeasance and stable overall pool performance reportedly led to higher ratings by Moody's on two classes worth $81 million of LB Commercial Mortgage Trust, Series 1998-C4. Moody's weighted-average LTV for the conduit component is 82 percent, compared to 83 percent In November 2006 and 92 percent at securitization.

Considering the recent increases and future expectation for higher U.S. commercial mortgage loan defaults and losses, Fitch today said that it revised its surveillance review methodology for U.S. CMBS B-piece re-securitizations, also referred to as first loss CDOs/ReREMICs. The update resulted in placement on Rating Watch Negative for 188 tranches or $8.4 billion from 18 transactions. The total includes over $0.9 billion of commercial real estate collateralized debt obligation liabilities that were previously placed and remain under review for possible downgrade for performance issues.

Of the total, $3.2 billion represents tranches currently rated AAA by Fitch that generally hold over 50 percent of non-rated first loss and B category or below-rated CMBS bonds. The ratings of these deals are expected to suffer the most severe downgrades. Fitch expects to resolve these rating actions within the next 90 days.

CMBS B-piece re-securitizations are CRE CDOs and ReREMIC transactions that include the most junior bonds of CMBS transactions, which generally contain a sequential pay structure where losses are applied in reverse sequential order. The most junior class of bonds, the first loss bond, absorbs losses before other rated bonds in a respective transaction and is generally not rated. The B-piece re-securitizations contain all or a portion of the non-investment grade bonds from CMBS in which the asset manager, typically the B-Piece buyer, invests.

The previous rating model afforded significant credit to below investment grade bonds, and was developed to review transactions that did not have significant concentrations by obligor and/or industry. Revised methodology increases penalties for significant concentrations in these transactions and generally assumes a 100 percent loss on any non-rated first loss bond for any rating stress above B.

Fitch expects that unrated first loss bonds will experience a complete loss over time and bonds rated CCC and B will have a substantial loss in the event of a default.

Coco Salazar is an associate editor and staff writer for MortgageDaily.com.

e-mail: [email protected]

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