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The Ratings Journal

Recent ratings actions, activity

August 16, 2007

By COCO SALAZAR


photo of Coco Salazar

Turmoil in the credit markets has the ratings agencies reshaping their assumptions and methodologies on mortgage-related securities. Meanwhile, a second mortgage servicer saw its servicer rating downgraded.

Fitch revised the methodology for rating structured finance collateralized debt obligations to reflect increased risk associated with subprime residential mortgage-backed securities as portfolio collateral, according to an announcement Wednesday.

In addition to the previously-announced 25 percent increase in assumed default probability for U.S. subprime bonds issued since 2005, Fitch modified methodology for treatment of U.S. subprime bonds on Rating Watch Negative to assume a three-subcategory downward rating adjustment for purposes of the rating definition used in Default VECTOR, its core CDO modeling tool.

Also, Fitch now considers additional risk factors, such as those affecting recently issued subprime RMBS, Alt-A performance, closed-end second lien RMBS, and overlap with other structured finance CDOs as collateral, that may further increase the 25 percent default probability adjustment or otherwise modify modeling assumptions, today's announcement said.

As of Friday, Fitch completed reviews for 129 of 133 U.S. subprime residential mortgage-backed transactions with heavy concentrations of bonds originated in 2005 and 2006, according to another announcement. The transactions are part of 170 transactions Fitch had placed under analysis on July 12.

The reviews resulted in downgrades to 672 classes or $13 billion of the 2005 and 2006 vintage transactions, and ratings affirmations for 1,219 classes. After these actions, there were 1,526 investment grade classes worth $112.9 billion -- of which 601 or $87 billion had ratings of AAA -- and 365 below investment grade classes, Fitch reported.

Today, Fitch announced it placed on Rating Watch Negative all classes of 58 subprime RMBS transactions for $12.1 billion backed by closed-end second-liens. The actions, due to under performance, basically affect all Fitch-rated close-end second-lien mostly transactions from last year and 2005.

Affected securitizations were from issuers including Structured Asset Securities Corp., Terwin Mortgage Trust, Ace Securities Corp., C-BASS, CS First Boston Mortgage Securities Corp., Countrywide Asset Backed Securities, First Franklin Mortgage Loan Trust, Fremont Home Loan Trust, GS Mortgage Securities Corporation Trust, IndyMac ABS Inc., Merrill Lynch Mortgage Investors Trust, New Century Mortgage Corp. and Soundview Home Equity Loan Trust.

Meanwhile, Moody's Investors Service announced it downgraded the ratings of Irwin Home Equity Corp. to SQ2- from SQ2+ as a primary servicer of second lien residential mortgages and as a primary servicer of high loan-to-value residential loans. Volatility in those loan markets and Irwin Home's negative performance in the second quarter resulted in the reduction of Irwin's servicing stability assessment to below average from average, a news release indicated.

"Sustained negative performance could impact the willingness and ability of the parent corporation to invest and maintain current resource levels in the servicing platform," Moody's said in the announcement. "Additionally, there is uncertainty in the company's ability to maintain its servicing performance, staffing levels, turnover rates, and the composition of the management.

Irwin's ratings remain on review for another possible downgrade, which would most likely be within the range from SQ3+ to SQ3 depending on the continued deterioration of the second lien and high LTV markets and future performance.

Standard & Poor's says structured investment vehicles are weathering current market disruptions and maintained ratings on 30 structured investment vehicles due to several of their key structural aspects and the ratings analysis that go beyond a simple asset price volatility analysis.

"Structured investment vehicles have weathered various crises over the past 19 years, including the difficult credit conditions of 1990-1991, the Long-Term Capital Management collapse, and the Sept. 11, 2001, terrorist attacks," S&P said in an announcement. "They have responded by diversifying into multiple funding markets, such as Europe and the U.S., and by maintaining access to the best available liquidity sources, including banks and easily traded assets."

Structured investment vehicles, entities structured to be bankruptcy-remote, have been in existence in the U.S. and European debt markets since 1988. They generate returns for investors by taking exposure to long-term securities and funding these assets by issuing a mix of short-term debt and medium-term notes. The structured investment vehicles manager seeks to optimize the mismatch between asset returns and the cost of funding, while providing stable returns to capital, S&P explained.

Structured investment vehicles typically invest in credit market instruments, including U.S. subprime mortgage-backed bonds and CDOs, and have played a role in the recent liquidity crunch, according to published reports.

"Given that structured investment vehicles are structured so they don't have to liquidate immediately due to the liability profile and are structured with liquidity facilities to address market disruptions, we believe that the structure, in conjunction with the actual portfolio level detail, enable us to maintain these rating," S&P said.


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

e-mail: [email protected]


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