RMBS Ratings Continue to Contrast CMBS

Subprime deals Fremont Home Loan Trust 2003-A and 2003-B each had one class upgraded due to a strong build-up in credit enhancement, according to Moody’s Investors Service. But the most subordinated class of 2003-B was downgraded because the current credit enhancement level is low.

Moody’s said it downgraded two tranches from Group I of Chase Funding Trust, Series 2001-3 based upon the weaker-than-anticipated performance of the fixed-rate subprime collateral and the resulting erosion of credit support.

The three most subordinated classes from Bear Stearns ABS Trust Certificates 2001-3 were placed on review for possible downgrade because existing credit enhancement levels are low given the current projected losses on the underlying pools, as these have seen a spike in losses in recent months with severities rising and overcollateralization is below target level as of Tuesday, Moody’s said.

Moody’s cited that same reason for a possible downgrade on Class M-3 of FNBA Mortgage Loan Trust 2004-AR1, which is collateralized by Alt-A, first lien, hybrid, adjustable-rate mortgages.

Also facing possible lower ratings are seven certificates of subprime mortgage-backed Meritage Mortgage Loan Trust 2004-1 and 2004-2. This, because “the current credit enhancement provided by subordination, overcollateralization and excess spread for each deal is low compared to the projected pipeline losses of the underlying pool,” Moody’s said.

The servicer quality ratings of Homecomings Financial LLC as a primary servicer of prime, subprime, second-lien, high loan-to-value loans and as a special servicer were downgraded and could be further lowered. Moody’s said it took these actions after it lowered and placed on review for possible downgrade the senior unsecured debt rating of the parent company, ResCap, due to profit pressures. The change in the company’s financial condition to non-investment grade, as well as in its strategic direction, may affect the ability to continue a high level of investment in the servicing platform, potentially impacting servicer quality in the future. Homecomings servicing stability is down to average from its previous assessment of above average.

Meanwhile, the servicer quality rating of EMC Mortgage Corp. as a primary servicer of subprime loans was lowered to SQ1- from SQ1. In addition to the high level of volatility in the subprime market, Moody’s said the action was based on a reduction from strong to above average in the assessment of the company’s foreclosure and REO timeline management.

Moody’s announced it is proposing a series of enhancements that would bring greater transparency to the securitization process of nonprime residential mortgage-backed securities. The changes would include third-party oversight of the accuracy of loan information, making loan-level performance information available to transaction participants, making issuers provide stronger and more uniform representations and warranties to investors regarding loan information, and to have a third party in charge of monitoring and enforcing those representations and warranties.

The New York-based agency also proposed making greater credit distinctions based on the financial strength of the party providing representations and warranties, and that securitization sponsors standardize and expand RMBS performance reports, including the provision of loan-level information for public transactions prior to closing and through the life of the RMBS. All the proposals reflect conversations with market participants, industry trade organizations and oversight authorities.

While further disruptions to the subprime securities market could have significantly different net effects on individual financial guaranty insurers, Moody’s reported it has determined that risks by direct insurance of subprime RMBS will likely be well contained.

“Beyond the immediate disruption to the guarantors’ business opportunities due to chaotic conditions within the global credit markets,” Moody’s said, “these events are likely to be a positive catalyst for financial guarantor business growth over the medium term, as credit re-prices to levels that increase demand for their core product.”

In the commercial MBS sector, Moody’s announced it upgraded ratings on two classes worth about $34 million of commercial mortgage-backed Morgan Stanley Capital I Inc., Series 1999-RM1, due to an increased percentage of defeased loans and increased subordination levels.

Increased subordination levels, an increased percentage of defeased loans and improved overall pool performance earned higher ratings for three classes or about $170 million worth of First Union–Lehman Brothers-Bank of America Commercial Mortgage Trust, Series 1998-C2, Moody’s said.

Upgrades by Moody’s were reportedly also seen on two classes or about $44 million of Paine Webber Mortgage Acceptance Corporation V, Commercial Mortgage Pass-Through Certificates, Series 1999-C1 because of increased subordination levels and a large percentage of defeased loans.

Commercial Mortgage Asset Trust, Series 1999-C2 received upgrades on three classes, totaling $60 million, based on an increased percentage of defeased loans, stable overall pool performance and increased credit support, Moody’s reported.

Bear Stearns Commercial Mortgage Securities Trust 2001- TOP4 reportedly saw improved ratings by Moody’s on three classes or $54 million due to increased credit support and stable overall pool performance.