$23 Billion in 2007 Deals Downgraded

Substantially enhanced ratings stability and greater overall credit support are expected in U.S. residential-mortgage-backed securities deals rated by Standard & Poor’s Ratings Services due to revised overcollateralization floor guidelines that resulted from altered modeling assumptions on provisions that allow the release of credit support after the step-down date in the transactions. In most cases, the ratings agency announced it will look for higher minimum overcollateralization levels throughout the life of rated RMBS deals.

The provisions regarding the release of credit support contributed to a number of the downgrades S&P reported Monday on $4.6 billion in subprime-loan-backed RMBS issued in 2005.

S&P reviewed the impact that overcollateralization floors have on the release of credit support and determined that a floor, derived on a transaction-specific basis, may better protect the stability of the ratings on classes in future securitizations. Thereby, S&P said it will apply the new floor when rating all transactions that use excess spread and O/C to cover losses.

For example, one of the 2005 transactions that was downgraded two notches would have avoided any rating action using the revised floor calculation. A second class that was downgraded four notches would have experienced a single-notch downgrade.

S&P reported today it downgraded 1,713 classes of subprime, Alt-A and second mortgage transactions issued this year for $23.35 billion. Additionally, 646 classes for $3.3 billion have been placed on CreditWatch negative.

The move was taken because the current year’s deals have the same risks as 2006 transactions, S&P said. Second lien transactions were affected more than first lien deals due to their “very poor performance.”

Five classes of certificates issued by NovaStar Mortgage Funding Trust in 2004 have been placed on review for possible downgrades by Moody’s Investors Service, the agency announced. The action on the subprime transactions was taken based on actual performance compared to expected performance.

Four tranches of Citigroup Mortgage Loan Trust in 2003 were downgraded, Moody’s reported. The subprime deal has seen higher delinquencies and losses than projected — causing an erosion of overcollateralization.

One class of Ameriquest Mortgage Securities Inc., series 2003-2, was placed under review for a downgrade, while two classes of series 2003-2 were downgraded. Moody’s also cited higher delinquencies and losses than projected and an erosion of overcollateralization for the downgrade on the subprime securities.

Similar reasoning led four classes of Impac Secured Assets Corp., series 2004-1, series 2004-3 and series 2004-4 to be placed on review for upgrade or downgrade, Moody’s said. Alt-A loans back those deals.

Aames Mortgage Trust, series 2001-4 and series 2001-4, as well as Morgan Stanley Dean Witter Capital I Inc. Trust, series 2002-AM2, saw classes downgraded because credit enhancement levels may be low given the current projected losses.

S&P announced it lowered its ratings on the commercial paper, medium-term notes, and mezzanine capital notes issued by Rhinebridge PLC and Rhinebridge LLC, two co-issuing structured investment vehicles. Additionally, Rhinebridge’s issuer credit rating was lowered and the ratings remain on review for potential further downgrades. The portfolio is predominantly invested in structured finance assets, of which the majority are in U.S. RMBS. Current rated outstanding debt of the vehicle is $791 million in commercial paper and $130 million in mezzanine capital notes.

The downgraded ratings, which remain on review for potential further downgrade, reflect the recent sharp decline in some assets, which led to a significant decrease in Rhinebridge’s net asset value as a percentage of capital. The downturn in net asset value has breached a trigger of 50 percent, and the vehicle is now failing its major capital loss limit test. Rhinebridge must cure this test within five business days to avoid entering enforcement mode, which could lead to an acceleration of all liabilities and a forced asset sale.

In CMBS, Fitch Ratings removed from review for possible downgrade the ratings of two classes of Credit Suisse First Boston’s commercial mortgage pass-through certificates, series 2005-CND2. The classes got off the hook from being downgraded because the largest loan in the trust was paid off without any fees being absorbed by the trust.

A 74.3 percent pay down since Fitch last rated Greenwich Capital Commercial Funding Corp. 2005-FL3 reportedly earned upgrades for five of the deal’s classes worth almost $33 billion.

Better ratings, however, were seen in almost $38 million of JPMorgan Chase Commercial Mortgage Securities Corp., series 2001-CIBC3. Fitch said it upgraded two classes because of increased credit enhancement levels due to additional paydown, amortization and additional defeasance of 11 loans since its last rating action.

But that was not the case of three classes in Merrill Lynch Mortgage Investors Inc.’s mortgage pass-through certificates, series 1999-C1 that had been on Rating Watch Negative. Fitch said it downgraded the $52 billion in classes because of the increase in expected losses and the length of time that the assets have been in special servicing — over 24 months. Several office buildings make up the transaction’s assets.

Meanwhile, Moody’s pushed up the ratings of three classes of First Union National Bank-Chase Manhattan Bank Commercial Mortgage Trust, Series 1999-C2 for $71 million, reflecting a large percentage of defeased loans and stable overall pool performance.

J.P. Morgan Commercial Mortgage Finance, series 1999-C8, saw two classes for $468.5 million upgraded by Moody’s primarily due to defeasance and improved credit enhancement.

Moody’s cited defeasance, increased subordination levels and stable overall pool performance for its upgrade of two COMM 1999-1 classes for $901.7 million.