Ratings Downgrades Abundant

Moody’s Investors Service announced Wednesday downgrades on 120 securities originated in the second half of 2005 backed by subprime, first-lien mortgages due to higher-than-anticipated delinquency rates from aggressive underwriting. With an original face value of over $1.5 billion, the affected securities represent 0.7 percent of subprime, first-lien volume rated by Moody’s in that period.

The vast majority of the downgrades were reportedly or securities originally rated Baa or lower and no action was taken on transactions rated Aaa or Aa.

Among the issuers affected by the Moody’s actions were Accredited Mortgage Loan Trust 2005-4, ACE Securities Corp. Home Equity Loan Trust, Series 2005-HE5, Aegis Asset Backed Securities Trust 2005-5, Argent Securities Inc., Series 2005-W5, Bear Stearns Asset Backed Securities I Trust 2005-FR1 and C-BASS Mortgage Loan Asset-Backed Certificates, Series 2005-CB6, according to the press release.

Tuesday, Fitch Ratings announced it placed 235 residential mortgage-backed transactions worth $92.1 billion in debt outstanding “under analysis.”

The largest share of the debt — $72.7 billion — is from 104 U.S. subprime transactions originated in 2006, and the remaining $19.4 billion involves 131 pre-2006 vintage deals.

However, Fitch noted that only $4.2 billion of the securities placed under analysis are rated BBB and lower, and it is these bonds that are most likely to face ratings changes.

Fitch said it “proactively” placed the 2006 deals for review and will take each one through its committee process, which, upon completion, will result in rating actions on its entire 2006 subprime portfolio. The pre-2206 deals were flagged as part of the monthly surveillance process, which identifies rated bonds with credit risk inconsistent with current ratings.

Fitch recently placed on Rating Watch Negative two classes in the Series 2001-AD1 Group 2 and two classes in the Series 2003-1 Group 2, downgraded ratings on three classes in the Series 2001-C2 Group 1. The negative actions on seven Chase Funding mortgage pass through certificates collateralized by first- and second-lien subprime fixed- and adjustable-rate mortgages reflect deterioration in the relationship between credit enhancement and expected losses, and affect approximately $770 million in outstanding certificates.

Fitch explained that excess spread is generally ample enough in the fixed-rate pools to supply the ARM pools with excess. However, in cases where negative actions were taken, “excess spread amounts, including the shared amount from the fixed-rate pools, were not great enough to cover the realized losses.”

On servicer ratings, Fitch placed NovaStar Mortgage Inc.’s RPS3+ residential primary servicer rating for subprime product and RSS3+ special servicer rating on review for a possible downgrade, according to an announcement Tuesday.

In addition to disruption in the secondary mortgage market, NovaStar’s financial flexibility or condition — an important component of the servicer rating process — is under “significant strain,” Fitch said, noting NovaStar’s efforts to raise $150 million in capital and its temporary exit from the wholesale market, which reduced staff by about two-fifths.

The uncertainty NovaStar’s limited capital position and transition into operating with diminished volume also led to a downgrade by Moody’s on its servicer quality rating to SQ4+ from SQ3+ as a primary servicer of subprime residential loans.

Moody’s took the same action and rating on Accredited Home Lenders Inc.’s servicer rating for the same reasons as NovaStar in addition to uncertainty associated with the purchase of Accredited by Lone Star Fund V L.P. and affiliates and its delayed filing of 2007 financial statements.

Specialized Loan Servicing LLC had ratings lowered to SQ4+ from SQ3 as a primary servicer of second liens and to SQ4+ from SQ3 as a primary servicer of subprime residential loans, Moody’s announced.

And Fremont Investment & Loan was downgraded as a primary servicer of subprime loans to SQ4 from SQ4+, Moody’s said.

Moody’s said all four companies had below average servicing stability and remain on review for other possible downgrades.