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2nd Lien Performance Erodes

2nd Lien Performance ErodesRecent MBS ratings activity

April 3, 2008


The latest round of downgrades to classes of residential mortgage-backed securities was concentrated in deals backed by subprime loans and second liens.

Changes to its subprime assumptions prompted Fitch Ratings to downgrade $0.7 billion in classes from six subprime transactions for Citigroup Mortgage Loan Trust, series 2005-HE1, 2005-HE3, 2005-HE4, 2005-OPT1, 2005-OPT3 and 2005-OPT4. Another $0.2 billion in classes was placed on Rating Watch Negative.. Cumulative expected losses range from 4.1 percent to 15.2 percent and delinquency ranges from 29.5 to 57.0 percent.

Fitch also cited the changes in its downgrade of more than $0.7 billion in classes from four deals for UBS MASTR Asset Backed Securities: series 2005-FRE1, 2005-WF1, 2005-NC1 and 2005-NC2. Less than $0.1 billion was placed on watch. From 4.9 to 18.7 percent in cumulative losses are projected to occur, and delinquency ranges from 20.1 to 42.8 percent.

Classes of IndyMac, series 2005-A, 2005-B, 2005-C and 2005-D for nearly $0.5 billion were downgraded by Fitch as a result of its subprime changes. Another $0.2 billion in classes were placed on watch. Cumulative expected losses range from 7.2 to 16.8 percent and delinquency ranges from 29.4 to 36.1 percent.

Another downgrade because of Fitch’s updates was $0.5 billion in classes of NovaStar Mortgage Funding Trust, series 2005-1, 2005-2, 2005-3 and 2005-4. Delinquency is between 24.9 and 29.1 percent and cumulative losses anticipated range from 4.3 to 9.2 percent.

Four IXIS Real Estate Capital Trust mortgage pass-through certificates issued in 2005 saw classes totaling almost $0.3 billion downgraded because of Fitch’s updated assumptions on subprime losses. In addition, $0.2 billion in classes were put on Rating Watch Negative. While the cumulative expected losses are projected to be anywhere from 6.2 to 18.2 percent, the delinquency ranges between 39.1 to 44.4 percent.

Credit-Based Asset Servicing and Securitization LLC, series 2007-SL1, had two classes downgraded by Fitch. The classes are insured by XL Capital Assurance Inc, which saw its debt downgraded by Fitch last week.

Moody’s Investors Service downgraded 11 certificates, maintaining three for further possible downgrade, on C-Bass Mortgage Loan Asset-Backed Certificates, series 2006-SL1. The actions are based on the deteriorating performance of transactions backed by closed-end-second liens — eroding credit enhancement.

Moody’s downgraded 53 certificates from ACE Securities Corp. Home Equity Loan Trust transactions: series 2006-ASL1, 2006-SL1, 2006-SL3, 2006-SL4, 2007-ASL1 and 2007-SL1, and 15 classes were placed on review for possible downgrade. The downgrades were the result of the low levels of bonds’ credit enhancement in comparison to the current projected loss numbers from the last rating levels.

For the same reason, CSFB Home Equity Mortgage Trust had 44 certificates, 16 of which remain on review, downgraded by Moody’s. The downgrades occurred on five transactions: series 2006-2, 2006-3, 2006-4, 2006-5 and 2006-6.

Moody’s cited the same logic in its downgrade of 13 certificates of Morgan Stanley Mortgage Loan Trust, maintaining two for further possible downgrade, in two transactions, series 2006-4SL and 2006-10SL.

Merrill Lynch Mortgage Investors Trust 2006-SL2 saw nine certificates downgraded and two left on review for further downgrade by Moody’s because of worsening second lien performance.

J.P. Morgan Alternative Loan Trust transactions issued from 2005 to 2007 saw 96 tranches downgraded by Moody’s because the Alt-A loans backing the deals have seen higher than anticipated delinquency, foreclosure, and REO relative to credit enhancement levels.

While most categories of collateralized debt obligations saw fewer downgrades last year, CDOs backed by subprime RMBS saw widespread downgrades, Moody’s reported. The agency downgraded 1,331 tranches of U.S. dollar-denominated re-securitizations in 2007, with downgrades heavily concentrated in the 2006 and 2007 vintages.

“Looking forward through 2008, the rating agency projects even greater ratings volatility among U.S. dollar re-securitization CDOs as signaled by the nearly 2,000 tranches currently under review for downgrade,” Moody’s said.

The only commercial activity was Merrill Lynch Mortgage Loans Inc., series 1999-1STT, being placed on review for possible downgrade by Moody’s as a result of TransCanada Pipelines Limited’s ratings also being placed on such review.


Natalie Merrill is a staff writer for with a Journalism degree from Southern Methodist University.


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