MBS Downgrades Persist

The rating methodology for structured finance CDOs was changed to reflect heightened default expectations of subprime residential MBS, particularly for deals issued in 2006 and 2007, Derivative Fitch announced. The company cited losses on below investment grade subprime securities as well as an increased propensity for credit co-movement of securities within the subprime sector — especially recent vintages. Also mentioned was the accurate and timely probability of default estimates given the rapidly evolving credit environment in the residential mortgage market.

The methodology changes are effective immediately, replacing interim methodology changes that were announced in July and August, and have been applied to the review of the portfolio of structured finance CDO ratings with exposure to U.S. RMBS.

Derivative Fitch also said it updated its Default Vector Model, or VECTOR 3.2, to incorporate the amended criteria. As previously disclosed, the agency is in the process of reviewing the core VECTOR modeling assumptions and methodology that could impact ratings of all CDOs, including those with corporate bond or corporate loan collateral. Fitch is reassessing its analytic views which could impact existing ratings. The review is expected to be completed in a few weeks.

Moody’s Investors Service downgraded a class of Alt-A loan-backed Lehman Mortgage Trust 2006-1 and placed on class on review for possible downgrade in the 2006-3 deal due to higher-than-anticipated rates of delinquency, foreclosure, and real estate owned in the underlying collateral relative to credit enhancement levels, according to an announcement.

That was the same reason cited by Moody’s for ratings actions on a number of other of Alt-A loan deals.

Among Moody’s actions were downgrades on six tranches and placement on review for possible downgrade for two classes of HarborView Mortgage Loan Trust 2005-14, and 2006-11 and 3. Moody’s also lowered ratings on 13 classes and potential downgrades for six tranches from American Home Mortgage Assets Trust 2005-2 and American Home Mortgage Investment Tr 2006-3 and 2. The agency assigned worse ratings on 11 tranches of Barclays Capital Alt-A deals BCAP LLC Trust 2006-AA1 and AA2 and might downgrade eight classes.

Moody’s also cited poor performance in downgrades on 15 tranches of Terwin Mortgage Trust 2006-3, 5, 7, 9HGA and 17HE and potential downgrades for three classes. It downgraded two classes from Structured Asset Mortgage Investments II Trust 2006-AR3, downgraded 12 tranches and might potentially downgrade six classes Banc of America Funding 2006-7, G and H Trusts. Moody’s also downgraded 18 classes from Deutsche Alt-A Securities Mortgage Loan Trust, Series 2006-AR4 and AR5, Deutsche Alt-A Securities Inc. Mortgage Loan Trust Series 2005-5, and 2006-AF1, AR1, AR2, AR3 and AR6, Deutsche Alt-B Securities Mortgage Loan Trust, Series 2006-AB1 through AB4.

Moody’s announced it upgraded 17 certificates but downgraded 23 certificates of subprime loan-backed Asset Backed Securities Corporation Home Equity Loan Trust 2004-HE9; MASTR Asset Backed Securities Trust 2003-WMC2, 2004-WMC1 and 2; Merrill Lynch Mortgage Investors Inc. 2004-WMC1 through 5; Morgan Stanley ABS Capital I Inc. Trust 2004-WMC1 through 3; and Soundview Home Loan Trust 2004-WMC1. The certificates being upgraded showed strong build-up of credit enhancement, while Moody’s indicated that the negative actions resulted from losses that have begun to erode overcollateralization, leaving the bottom rated bonds less protected.

Over $49 million or three classes of Credit Suisse First Boston’s commercial mortgage pass-through certificates, series 2001-CF2, reportedly received upgrades from Fitch Ratings as a result of additional paydown of 5.4 percent and defeasance of 8.3 percent since the last rating action.

Higher ratings were issued by Moody’s to three classes of J.P.Morgan Chase Commercial Mortgage Securities Corp., Commercial Mortgage Pass-Through Certificates, Series 2006-FL1 reportedly due to loan payoffs, amortization and stable pool performance.