CMBS Volume Headed Lower

Moody’s Investors Service announce it downgraded the ratings of 107 tranches and has placed under review for possible downgrade the ratings of 25 tranches from 18 deals issued by Bear Stearns in 2006 and late 2005 and collateralized by Alt-A loans. The actions were due to higher than anticipated rates of delinquency, foreclosure, and REO in the underlying collateral relative to credit enhancement levels. The affected deals were Bear Stearns Alt-A 2006-1, Trust 2005-10, and 2006-2 through 8 and 2005-12, and Bear Stearns Asset Backed Securities I Trust 2005-AC9, 2006-AC1 through 5 and 2006-ST1, and Bear Stearns Mortgage Funding Trust 2006-AC1.

Ratings on 60 tranches of Countrywide Alt-A deals securitized in 2006 were downgraded while another 39 tranches were placed on review for downgrade. The action was the result of worse than anticipated performance.

Moody’s placed on review for possible downgrade a certificate issued by Morgan Stanley Mortgage Loan Trust 2004-6AR. The action on the Alt-A, adjustable-rate mortgage-backed deal was based on the analysis of credit enhancement provided by subordination, overcollateralization and excess spread relative to the expected loss.

Due to existing credit enhancement levels possibly being low given the current projected losses on underlying pools, Moody’s downgraded two certificates and placed on review for potential downgrade seven certificates from People’s Choice Home Loan Trust Series 2004-1 and 2004-2, which is backed by subprime loans; and downgraded class M-3 of FNBA Mortgage Loan Trust 2004-AR1, collateralized by Alt-A first-lien hybrid ARMs.

Fitch Ratings announced almost $40 million in downgrades for Structured Adjustable Rate Mortgage Loan Trust, Series 2005-22 Group 1 and 2, 2006-1 Group 1 and 2, and 2006-9 Group 1 reflect deterioration in the relationship between credit enhancement and expected losses. Larger than expected losses in the conventional-loan backed deal are due to a rapidly increasing delinquency pipeline — the range of 60+ delinquencies for all downgraded transactions is about 1.75 percent to 7.5 percent.

Deterioration of such relationship also reportedly led to downgrades by Fitch on nearly $78 million or 38 outstanding certificates of Alt-A loan-backed First Horizon Alternative Series 2005-AA11, 2006-AA3, 4, and 6 through 8, and FA2, 3, and 5 through 7 — the 90+ delinquency for the affected deals ranges from 1.34 percent to 5.52 percent of the current collateral balance.

Moody’s today issued a correction announcement on tranches from Bayview Financial Mortgage Pass-Through Trust 2006-D that were downgraded as a part of the subprime sweep for the 2006 vintage that was concluded on Oct. 11, 2007. Three classes of the deal were placed on review for possible downgrade. Additionally, Moody’s is reviewing for possible downgrade a class from Bayview Financial Mortgage Pass-Through Trust 2006-B and three classes from Bayview Financial Mortgage Pass-Through Trust 2006-C.

Moody’s said recent downgrades of subprime residential mortgage backed securities triggered overcollateralization-linked events of default in several cash and hybrid collateralized debt obligations, which gives senior investors the right to potentially liquidate the underlying asset pool. The ratings agency is closely monitoring senior overcollateralization values of CDOs where the downgrades may affect the calculation of the aggregate outstanding par amount, and taking action as appropriate.

“Many transactions with event of default triggers based on overcollateralization ratios include rating-based haircuts when calculating the aggregate outstanding par amount of the underlying assets,” Moody’s explained in an announcement. “Recent downgrades of subprime RMBS have magnified the impact of rating-based par haircuts on [overcollateralization]-linked [event of default] triggers, causing several CDOs to breach this provision.”

Moody’s also announced that the liquidity crunch will cause a decline in commercial MBS and commercial real estate CDO issuance for at least the next few quarters, while delinquencies will rise in response to aggressive loan underwriting and peaking property values.

“The liquidity crunch is reducing collateral origination to a trickle and prompting issuers to revisit simpler and less risky loan and deal structures,” Moody’s said in the written statement.

The debt service coverage ratio and loan-to-value are the two most significant metrics for tracking commercial loan strength and both weakened in the third quarter to a new low of 1.22 and new high of 117.5, respectively. The lower DSCR illustrated a meaningful pickup in term default risk, which Moody’s addressed by increasing subordination requirements, and while the high LTV may represent the peak for the near term as better underwritten loans become bigger shares of future deals. Moody’s expects that market correction for commercial will not be as sharp as that for subprime RMBS due to transparent cash flows, sophisticated investors, and strong property fundamentals.

And while CRE CDOs did not fall prey to the same aggressive underwriting as CMBS deals, their issuance will also be dampened demand for simpler deals is expected. Moody’s said the structure of future CRE CDOs can be simplified by using smaller reinvestment buckets, fewer pro rata pay structures, and less “IC/OC” tests, as well as using less B-notes and more whole loans and fewer repositioning stories and more stabilized assets.

Fitch placed two classes or nearly $38 million of deferrable floating-rate notes issued by Dalton CDO Ltd on Rating Watch Negative due to collateral credit quality deterioration in the long portfolio since the transaction closed. The “negative credit migration which has taken place since close and anticipated further deterioration in the long portfolio outweigh the actual and potential further gains from unwinding short positions and reinvesting the proceeds in higher quality collateral at discounted prices,” Fitch noted.

Moody’s upgraded the ratings of six classes worth nearly $74 million of GMAC Commercial Mortgage Securities Inc., Series 2003-C1 as a result of an increased percentage of defeased loans.