Volatility Ahead for CMBS

Moody’s Investors Service announced that low existing credit enhancement given current projected losses on underlying pools accounted for lower ratings on 12 certificates and placement under review for possible downgrade of one certificate from Credit Suisse First Boston Mortgage-Backed Pass-Through Certificates, Series 2002-5, 2002-18, 2003-AR26, 2003-4, 2002-HE4, 2002-HE16, and CSFB Mortgage Acceptance Corp., Series 2002-HE4. The first three deals are backed by Alt-A loans and the last four by subprime loans.

Credit enhancement levels relative to higher-than-anticipated rates of delinquency, foreclosure, and real estate owned in underlying collateral, which consists of Alt-A loans, resulted in downgrades for 81 tranches and placement under review for possible downgrade for 15 tranches of Goldman Sachs’ GSAA Home Equity Trust 2005-14, 15, MTR1 and 2006-1, 3, 4, 5, 6, 8, 9, 11, 12, 14, 17, 19, 20, GSAA Home Equity Trust Asset Backed Certificates Series 2005-12 and GSAA Home Equity Trust 2006-16, Asset-Backed Certificates, Series 2006-16; downgrades on 57 classes and possible lowered ratings for 25 tranches from IndyMac INDX Mortgage Loan Trust 2005-AR27, AR29, AR31, AR33, AR35, and 2006-AR5, AR7, AR11, AR15, AR19, AR21, AR25, AR27, AR29, AR3, AR35, AR39 and AR41; downgrades on 77 tranches and potential downgrades on 34 classes of Lehman XS Trust Series 2005-3, 6, 8, 10, and 2006-1, 3, 5, 7, 8, 9, 11, 13, 15, 17, 19 and 20; downgrades on 64 tranches and potential lowered ratings on 34 classes of Impac loan-backed Bear Stearns Asset Backed Securities I Trust 2006-IM1, CWABS Asset-Backed Certificates Trust 2005-IM1 through IM3 and 2006-IM1, and Impac CMB Trust Series 2005-8, Impac Secured Assets Corp. Mortgage Pass-Through Certificates, Series 2005-2 and 2006-1 through 5.

Nomura deals from 2005 and 2006 saw 48 tranches downgraded and 30 tranches placed on review by Moody’s. The negative actions on the affected 10 Alt-A deals were the result of worse than expected performance as well as changes to Moody’s methodology.

Poor performance on two GSC Capital Alt-A transactions from 2006 led Moody’s to downgrade nine tranches and place five tranches under review for a downgrade.

CSFB Mortgage-Backed Pass-Through Certificates Series 2002-AR2 and 2003-AR12 reportedly saw ratings lowered by Moody’s on three classes collateralized by adjustable-rate, jumbo A mortgages based on existing credit enhancement levels relative to the current projected losses on the underlying pools.

National City Mortgage saw residential primary servicer ratings for both prime product and Alt-A product lowered by Fitch to RPS2+ from RPS1- due to weakening financial strength at parent National City Corp., which was recently downgraded and given a negative rating outlook, according to an announcement.

On the commercial side of mortgage-backed securities, Moody’s upgraded the ratings of four classes worth over $43 million of Morgan Stanley Capital I Inc., Commercial Pass-Through Certificates, Series 2003-IQ4 as a result of stable overall pool performance and increased credit support.

Bear Stearns commercial mortgage pass-through certificate, series 2004-BBA3 saw a class of almost $8 million upgraded but a class of nearly $16 million downgraded by Fitch. The ratings agency said the positive action was due to 27 percent paydown since the last rating action, while the lower rating reflected continued deterioration in performance of two remaining loans.

And the CMBS sector could see volatility increase due to decreasing diversity in underlying loans, unless offset by additional credit enhancement, Moody’s reported, noting the liquidity crunch is affecting the diversity and size of CMBS. The diversity in commercial mortgage loan pools has fallen to an average Herfindahl score of just 40 in the third quarter 2007 from a credit-neutral 100 in the late 1990’s, which translates to average commercial loan balance in recent deals equaling 2.5 percent of the pool. The Herf score is a measure of diversity that is calculated by an equation that converts pools of loans of unequal size into a simulated number of equal-sized loans, and the higher the score the less loan concentration.

“CMBS deals are on the frontier of where loan diversity becomes a significant credit issue,” Moody’s said. “Tools like the Herf score help Moody’s differentiate the diversity profile of deals, which is an important step toward seeing that they are properly enhanced.”