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Subprime Downgrades, CMBS Upgrades

Subprime Downgrades, CMBS Upgrades

Recent MBS ratings activity

October 26, 2007


photo of Coco Salazar
The upgrading of ratings on commercial mortgage-backed securities continued to contrast downgrades on residential subprime issuances. Meanwhile, uncertainty over Option One Mortgage Corp.’s future forced a second agency to lower its servicer rating.

OWNIT 2005-2 saw six classes for $84.1 million downgraded by Fitch Ratings based on changes to the agency’s subprime assumptions. Delinquency of at least 60 days is 23.65 percent on the issuance.

Eight classes of Morgan Stanley 2006-5AR for $19 million reportedly received lower ratings from Fitch to reflect deterioration in the relationship between credit enhancement and loss expectations.

Moody’s Investors Service said existing credit enhancement levels that may be low given current projected losses on underlying pools led to downgrades on Class B of adjustable-rate jumbo mortgage-backed MLCC Mortgage Investors Inc., Series 1999-A; seven certificates from subprime-loan-backed CWABS Inc Asset Backed Certificates Series 2002-BC2, and 2003-BC1 and 2; seven certificates from RAAC Series 2005-SP2; three subordinate certificates from First Franklin Series 2003-FF1; and placement on review for possible downgrade for five subordinate certificates of First Franklin Series 2002-FF1 and 2003-FF1 and two certificates of ABFC Mortgage Loan Asset-Backed Certificates, Series 2003-WF1.

Moody’s said “bonds’ current credit enhancement levels, including excess spread, could be too low compared to the current projected loss numbers at the current rating level” for downgrades on two classes of SACO I Trust 2005-GP1, which is backed by home equity lines of credit originated by GreenPoint Mortgage Funding Inc.; 58 classes in SACO I Trust 2005-1 through 10, and WM1 through 3, all backed by closed-end second lien loans; 22 classes in CSFB Home Equity Mortgage Trust 2005-3 through 5, HF1, and Home Equity Mortgage Trust 2005-1 and 2, backed by closed-end seconds and HELOCs; and 41 classes of Terwin Mortgage Trust, Series 2007-1SL and Series 2005-11,13SL, 3SL, 5SL, 7SL, and 9HGS, although two classes of 2007-SL1 were also placed on review for possible downgrade due to the unexpectedly high losses the pool has been taking only 8 months after closing.

Second lien loan-backed Terwin Mortgage Trust 2003-7SL had a mezzanine class downgraded because a drop in collateralization resulted in credit enhancement levels that seem too low to support the existing rating, Moody’s reported.

Moody’s said it lowered the ratings of class B-2 of GSAMP Trust 2003-HE2 based on the analysis of the credit enhancement provided by overcollateralization, excess spread and primary mortgage insurance, relative to the expected loss.

Class B-2 of MESA 2002-3 Global Issuance Co. had its rating lowered by Moody’s reportedly to reflect analysis of credit enhancement provided by subordination, overcollateralization, and excess spread, relative to the expected loss.

Decreased levels of subordination combined with higher back-ended expected losses led to Moody’s downgrade of 23 certificates and placement on review for possible downgrade of 57 certificates belonging to 34 subprime loan-backed deals originated in 2004 by Ameriquest Mortgage Co. and Argent Mortgage Co. Among the affected issuers were Ameriquest Mortgage Securities Inc., Series 2004-R1 through 5, Argent Securities Inc., Series 2004-PW1, Chase Funding Loan Acquisition Trust 2004-AQ1, GSAMP Trust 2004-AR1, and Park Place Securities, Inc., Asset-Backed Pass-Through Certificates, Series 2004-MCW1.

Also facing potential lower ratings are 16 tranches issued in Ameriquest Mortgage Securities Inc., Quest Trust 2004-X1 through X1 and 2005-X2. Each of the four scratch and dent mortgage-backed deals has experienced an increasing proportion of severely delinquent loans while the amount of available credit enhancement has been reduced from losses, Moody’s explained.

Two tranches from Merrill Lynch Mortgage Investors Inc. Series 2003-BC4 and four tranches from Specialty Underwriting and Residential Finance Trust Series 2004-BC1 and 2004-BC2 could get lower ratings because the current credit enhancement provided by subordination, overcollateralization and excess spread for each deal is low compared to the projected pipeline losses of the underlying pool, Moody’s said.

Following a similar move by Fitch earlier this week, Moody’s downgraded the servicer quality rating for Option One from SQ2+ to SQ2 as a primary servicer, and this could be further lowered. The special servicer rating of SQ2 was also placed on review for potential downgrade. The actions were due to the uncertainty of the sale of the company’s servicing platform to Cerberus Capital management. Parent H&R Block is not in compliance with certain closing conditions and has said it will divest the servicing operations if the sale does not occur.

Moody’s also announced First Tennessee Bank National Association’s servicer quality rating of SQ2+ as a primary servicer of second lien loans was placed on review for possible downgrade as a result potential long term ratings downgrades at First Horizon National Corp. First Tennessee serviced 274,215 loans for $12 billion as of Sept. 30, with half of that balance being home equity lines of credit.

First Horizon Home Loans’ SQ2+ rating as a primary servicer of prime loans and SQ2 rating as a primary servicer were also placed on review for downgrade, Moody’s reported.

Within CMBS deals, Fitch cited increased expected losses on the specially serviced loans for downgrades on three classes worth about $34 million in DLJ Commercial Mortgage Corp., series 2000-CKP1.

But DLJ 1999-CG1 reportedly saw upgrades by Moody’s on two classes or $62 million to reflect defeasance, increased credit support and stable overall pool performance.

Increased credit enhancement, improved overall pool performance and defeasance prompted a higher rating for the $47 million class F of GS Mortgage Securities Corporation II, Commercial Mortgage Pass-Through Certificates, Series 1999-C1, Moody’s said.

Two classes or $38 million of Bear Stearns Commercial Mortgage Securities Inc., Series 1999-WF2 reportedly saw better ratings by Moody’s due to increased subordination levels, defeasance and improved overall pool performance.

Moody’s upgraded three classes worth $37 million of Danbury Fair Mall Trust, Series 2001-DFM because loan-to-value ratio is about 62 percent, down about 3 percent and 8 percent since the last review and at the time of securitization, respectively.

Higher subordination levels and improved overall pool performance reportedly earned an upgrade by Moody’s for the $27 million class H of CSFB Mortgage Securities Corp., Series 1997-C1.


Coco Salazar is an associate editor and staff writer for

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