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Subprime Performance Deteriorates

Recent RMBS ratings activity

January 31, 2008


Two major ratings agencies reported further deterioration has been observed on subprime loans backing securitizations from 2006 and 2007 -- leading one of the agencies to take negative actions on over $270 billion in residential mortgage-backed securities.

Standard & Poor's Ratings Services warned Wednesday it took negative ratings actions on 6,389 classes valued at $270.1 billion from RMBS issued in 2006 and 2007 and backed by subprime first liens. In addition, 1,953 ratings from 572 global collateralized-debt obligations valued at $263.9 billion affected by the RMBS actions were placed on CreditWatch negative.

The New York-based ratings agency said the moves follow a Jan. 15 announcement that it further revised RMBS assumptions that reflect the expectation of further defaults and losses on the underlying mortgage loans and the consequent reduction of credit support.

On 2007 deals, 1,180 classes for $15.4 billion were downgraded and 567 classes for $37.8 billion were placed on negative watch, the announcement said.

S&P said it now expects lifetime losses to be around 17 percent on the 2007 vintage.

"The transactions issued during the first half of 2007 have what we consider to be an established trend of poor delinquency performance and have already realized losses," S&P said. "Cumulative losses on the subprime RMBS transactions issued during the first half of 2007 have increased to 0.25% from approximately 0.01%. At the same time, total delinquencies have grown to 20.40% from 7.43% and severe delinquencies have grown to 11.51% from 2.48%."

Also downgraded were 2,607 classes from 2006 RMBS valued at $34.7 billion and 1,180 classes for $15.4 billion from 2007 deals, according to S&P. More than 2,000 classes from 2006 deals with an aggregate balance of $136.0 billion were placed on CreditWatch negative.

Home price declines on properties in the 2006 vintage are greater than those from the 2007, likely leading to even more losses for 2006 deals, the report said. Cumulative losses on 2006 transactions have reached 1.13 percent, while the total delinquency rate increased to 28.79 percent. Expected lifetime losses are now at between 18 percent and 20 percent.

S&P projects further declines in the U.S. housing market and increased losses as adjustable-rate mortgages reset -- though "many of the affected borrowers will find relief through loan modifications that will hold initial interest rates constant for several years." Most impacted, especially in markets where values had appreciated the most, will be lower priced homes.

"Except for the CreditWatch resolutions, we do not anticipate further major rating actions for the U.S. RMBS subprime ratings issued during 2006 and the first half of 2007," the agency said.

In response to deteriorating performance, Moody's Investors Service today said it expects lifetime losses on 2006 subprime deals to be between 14 percent and 18 percent. Exact losses will depend on the rate of modifications, the U.S. economy and the direction of interest rates this year.

So far, Moody's said losses remain low -- currently less than 1.5 percent -- in part because foreclosures are taking longer than prior years. Losses will vary depending on the quality of the originator. Losses from deals issued in the fourth quarter 2006, when underwriting standards were weaker and real estate prices were weakening, could exceed 30 percent.

Moody's projects more negative ratings actions are on the way.

The agency has yet to perform a similar analysis on 2007 subprime deals and Alt-A deals from both years, though it expects these deals to perform worse like the fourth quarter 2006 subprime deals.

On the commercial side, Fitch Ratings placed class M of Merrill Lynch Floating Trust 2006-1, commercial mortgage pass-through certificates on Rating Watch Negative due to the lack of leasing at the pool's third-largest loan.

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: [email protected]

Nonprime and Subprime News | Subprime Statistics
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