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Subprime 2nds Downgraded, CMBS Volume Collapses

Subprime 2nds Downgraded, CMBS Volume CollapsesRecent MBS ratings activity

May 15, 2008


Nearly $30 billion in classes of subprime second-lien securitizations were downgraded this week. Issuance of commercial mortgage-backed securities is projected to collapse in 2008, with years passing before volume reaches even half of last year’s record level.

Moody’s Investors Service downgraded tranches of 819 subprime second-lien securities for $29.1 billion Tuesday. The 2005 through 2007 issuances, which represent 5 percent of total subprime deals rated the New York-based ratings agency, saw the negative actions because of higher loss projections. Average loss projection ranged from around 10 percent in the first quarter 2005 to approximately 51 percent by the third quarter 2007.

In response to Moody’s actions, MBIA issued a statement indicating that the second mortgages it guarantees have prime borrowers. The specialty-finance insurer noted Moody’s assumed an average of 13.8 percent for actual current losses to date for 2006 subprime second-lien securitizations and 7.1 percent for 2007 vintages.

“Loans with lower FICO scores and limited documentation within our securitizations have driven losses to-date, but those lower FICO borrowers represent a small part of the collateral in our deals which largely comprise prime quality borrowers,” MBIA stated. “While our portfolio is experiencing stress and we have a few deals that could ultimately experience cumulative losses greater than 40 percent, the weighted average cumulative losses to-date on our closed-end second portfolio equals approximately 3.5 percent.”

Three tranches of RAMP series 2004-RZ1 and 2004RZ3 Trusts, backed by 107 percent loan-to-value first mortgages, have experienced increasingly growing severities, causing losses through delinquent loan liquidations to grow. Those findings led Moody’s to downgrade the classes.

Seven tranches from First NLC Trust 2005-1 and 2005-2 were downgraded by Moody’s due to an increasing proportion of severely delinquent loans. A subsequent increase of losses will diminish the protection available to subordinated bonds.

Fitch downgraded the following classes of Alt-A issuances because of expected default and loss from delinquent loans, in addition to projected losses from the currently performing pool:

  • 114 classes of First Horizon issued from 2005 to 2007;
  • classes of Structured Asset Mortgage Investments Inc. transactions securitized in 2005 and 2006;
  • classes of dozens of 2005, 2006 and 2007 issuances of Residential Accredit Loans Inc.;

The following scratch-and-dent deals saw classes downgraded by Fitch:

  • $0.9 billion in classes of Residential Asset Mortgage Products issuances from 2003 to 2007;
  • $0.7 billion in classes from Bear Stearns Asset Backed Securities mortgage pass-through certificates issued from 2002 to 2007

North Cove CDO II, Ltd. /LLC, which has two-thirds of its underlying securities tied up in subprime residential MBS, saw five classes of notes for $0.2 billion downgraded by Fitch, reflecting significant collateral deterioration within the portfolio.

Moody’s projects $35 billion in 2008 CMBS issuance, plunging from a record $230 billion last year. Loans backing commercial transactions are displaying tighter underwriting standards, with year-to-date deals have LTVs under the 100 percent mark — a level not seen since early 2005.

“It may be several years before the CMBS market again sees conduit volumes in excess of $100 billion,” said Moody’s Managing Director Nick Levidy in the press release. “In retrospect, perhaps US CMBS should be viewed as a $50 billion to $100 billion per year business that spiked to $200 billion.”

Speculative class investors of CMBS issues from 2005, 2006 and 2007 should be among the only victims of a recent uptick in delinquency, with credit-support levels being generally adequate at the senior levels, Standard & Poor’s Ratings Services reported.

“In light of the global credit crunch and gradual ebbing of benign commercial real estate market conditions, we believe it’s increasingly clear that commercial real estate and CMBS may be buffeted by strong headwinds,” said S&P CMBS Practice Leader Kim Diamond in the announcement. “While it has been modest to date, we have already observed an up-tick in CMBS delinquencies, defaults, and losses.

But despite the rough outlook for some CMBS investors, 12 classes for more than $200 million of TW Hotel Funding 2005-LUX were upgraded due to overall improving property performances, release of a property and value appreciation.

Five classes for $49 million of Morgan Stanley Dean Witter Capital I saw upgrades by Moody’s. There have been no realized losses.

Four classes for $45 million from CDC Commercial Mortgage Trust 2002-FX1 were upgraded by Moody’s due to a significant increase in the percentage of defeased loans as well as increased credit support.

Three classes for $38 million of COMM 2007-FL14 were downgraded by Moody’s due to sponsorship concerns as well as a slowdown in market leasing.

Four classes for $24 million of Lehman Brothers Floating Rate Commercial Mortgage Trust 2006-CCL C2, commercial mortgage pass-through certificates were upgraded by Moody’s.

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of


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