RMBS, CMBS & CDO’s Downgraded

Two Alt-A, option adjustable-rate mortgage deals saw negative ratings actions due to higher-than-anticipated rates of delinquency, foreclosure, and real estate owned in the underlying collateral relative to credit enhancement levels, plus updates to the rating methodology on non-delinquent portions, Moody’s Investors Service said. Sixteen deals issued by CWALT Inc. Mortgage Pass-Through Certificates in 2006 and late 2005 saw 62 classes downgrades and 39 placed on review for possible lower ratings, while four transactions issued by Chevy Chase Funding LLC in 2006 received downgrades on 10 tranches.

Moody’s said analysis of the credit enhancement provided by subordination, overcollateralization and excess spread relative to the expected loss resulted in downgrades for two certificates issued by Alt-A, ARM-backed Morgan Stanley Mortgage Loan Trust 2004-6AR, downgrades on two subprime deals issued by ACE Securities Corp. in 2003; and potential downgrades on two certificates subprime-backed Ameriquest Mortgage Securities Inc. Series 2005-R2.

Four tranches, consisting of scratch and dent loans, of Citigroup Mortgage Loan Trust 2006-SHL1 were placed on review for possible downgrade by Moody’s reportedly because the amount of projected available credit enhancement has decreased due to a significant build-up of the pipeline of delinquent loans. That was also the case for five tranches of C-BASS Mortgage Loan Asset-Backed Certificates Series 2006-RP2 and two tranches issued by Credit Suisse in 2006 backed by scratch and dent loans.

Fitch Ratings said it downgraded $72 billion and could potentially downgrade $68 billion in outstanding certificates of Structured Asset Investment Loan 2003-BC 2 to reflect deterioration in the relationship between credit enhancement and expected losses. This also prompted $33 million in downgrades and $18 million in potential lower ratings for two Finance America deals issued in 2004.

Fitch’s updated subprime loss forecasting assumptions reportedly drove downgrades in $671 million of five SAIL deals in 2005; $31 million in downgrades and $35 million potential downgrades on two Structured Asset Securities Corp. deals from 2005; downgrades of $387 million and potential worse ratings on $96 million from nine Morgan Stanley deals in 2005; downgrades in $60 million of Saxon Asset Securities Trust Series 2005-3; downgrades on $20 million of RASC 2005-KS7; downgrades on $38 million of GSAMP 2005-HE4; and downgrades of $34 million and potential downgrades of $12 million in ABFC Series 2005-OPT1.

November held $51 billion in downgrades by Moody’s across 952 tranches in 267 U.S. structured finance CDO securities. The lowered ratings accounted for over 9 percent of Moody’s-rated U.S. SF CDOs volume on Nov. 30 and push to nearly $63 billion the year-to-date downgrades for such tranches, according to an announcement. A total of 1,986 tranches or $174 billion of SF CDO classes remain on review for downgrade.

While last month completed the preliminary rating review of 2006 and 2007 vintage SF CDOs affected by Oct. 11 rating actions on RMBS, Moody’s expects to take more negative rating actions on SF CDOs in future months as it reassesses credit risk across all CDO vintages This will include pre-2006 vintage SF CDOs due to continuing deterioration in the housing sector, along with worsening residential loan performance and prolonged stresses of the credit markets.

A $20 million class of GMAC Commercial Mortgage Securities Inc., series 1999-C1, received a downgrade “due to increased loss expectations on the specially serviced loans as well as a higher number of Fitch Loans of Concern (9.8%) since Fitch’s last rating action,” the ratings agency said.

Fitch said it upgraded $82 million in classes of DLJ Commercial Mortgage Corp. series 1998-CG1 because of increased subordination levels resulting from additional paydown since its last rating action.

Moody’s announced better ratings for 35 classes worth almost $680 million in 25 CMBS deals because their credit profiles benefited from significant amortization buildup, pay downs and defeasance. The classes belonged to Deutsche Mortgage & Asset Receiving Corporation 1998-C1, Morgan Stanley Capital I Inc. 1998-CF1, First Union Commercial Mortgage Trust 1999-C1, Bear Stearns Commercial Mortgage Securities Inc. Series 1999-C1, Morgan Stanley Capital I Inc. 1999-WF1, DLJ Commercial Mortgage Corp. 1999-CG2, Commercial Mortgage Acceptance Corp. 1999-C1, Salomon Brothers Mortgage Securities VII Inc. 1999-C1, GMAC Commercial Mortgage Securities Inc. 2000-C1, DLJ Commercial Mortgage Trust 2000-CKP1, GE Capital Commercial Mortgage Corp. Series 2000-1, CS First Boston Mortgage Securities Corp. Series 2001-CF2, Washington Mutual Multifamily Mortgage 2001-1Limited, Morgan Stanley Dean Witter Capital I Trust Series 2001-TOP5, First Union National Bank Commercial Mortgage Trust Series 2002-C1, J.P. Morgan Chase Commercial Mortgage Securities Corp 2002-CIBC4, GE Commercial Mortgage 2002-2, Wachovia Bank Commercial Mortgage Trust 2002-C2, Merrill Lynch Financial Assets Inc. Series 2002-Canada 8, Greenwich Capital Commercial Funding Corp. Series 2002-C1, Washington Mutual Asset Securities Corp. Series 2003-C1, Credit Suisse First Boston Mortgage Securities Corp. Series 2003-CK2, Solar Trust Series 2003-CC1, Wachovia Bank Commercial Mortgage Trust 2004-C10, and Greenwich Capital Commercial Funding Corp. 2004-GG1.

Fitch announced it reviewed the potential ratings impact of the existing or imminent default of 56 loans in 37 CMBS deals in which the borrower is MBS Cos., an owner and operator of apartment properties in Texas.

Of the total $777 million of MBS exposure, Fitch has identified 34 loans worth $376 million in 17 of its rated CMBS deals. Exposure to MBS by outstanding balance ranges from 0.16 percent to 3.6 percent in each of the transactions, which were securitized between 1999 and 2006. Each transaction has a first loss unrated bond ranging from $15 million to $53 million to absorb expected losses. Applying a 40 percent hypothetical loss severity to each MBS loan could result in impairment to selected bonds rated B- and below, Fitch said.

Derivative Fitch announced its recent review of its rated cash U.S. commercial real estate CDOs showed that deals categorized as first loss transactions are the most likely to experience negative rating migration in 2008. Fitch currently maintains ratings on 35 first loss CUSIP CDOs totaling nearly $16 billion of rated bonds.

Fitch’s rated universe of 113 CRE CDOs and ReREMICs totaling $54 billion can be put into three subcategorizes based on collateral composition. First loss CRE CUSIP CDOs/ReREMICs are deals which include the most junior CMBS bonds; non-first loss CRE CUSIP CDOs have predominantly investment grade CMBS, REITs and other rated bonds; and CREL CDOs consist of more than 50 percent unrated CRE loans.

Meanwhile, the performance of non-first loss or mezzanine transactions is dependent on the actual rating migration of the underlying CMBS transactions, and U.S. CMBS is anticipated to have stable ratings for 2008. And stress testing of the CREL CDOs showed that the investment grade tranches of these transactions can withstand a 25% commercial real estate market value decline.

“The first loss CRE CDO/ReREMIC transactions, in general, contain concentrations of the entire stack of non-investment grade bonds from CMBS transactions in which the asset manager, typically the CMBS B-Piece buyer, invests,” the ratings agency said in the announcement. “Fitch expects that most unrated first loss bonds will experience complete losses over time, as many of these tranches have a class size that ranges from 1% to 2%.”

Review of first loss transactions was prompted by Fitch’s anticipation of increased defaults and losses on the loans in the underlying CMBS transactions. But Fitch is refining its methodology for reviewing and rating these transactions to better reflect expected reduced performance, and for this sector’s review has broadened its universe of deals classified as first loss CUSIP CRE CDOs to include deals whose underlying CMBS bonds at time of CDO closing were more than 15 percent rated below B-, or had a concentration of CMBS bonds that were more than 25 percent below BB.