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Low Rates Pushing Up Credit Support on Subordinate Home Equity Certs

Low Rates Pushing Up Credit Support on Subordinate Home Equity Certs

Recent subprime RMBS ratings activity

July 8, 2003


A buildup of excess credit support in home equity securitizations is likely to impact principal payments but not in a negative way, according to a report from Moody’s Investors Services. Moody’s anticipates that more subordinate certificates will receive principal payments before more senior mezzanine certificates because of the buildup. This “phenomenon” is the result of record-high prepayments, record-high refinancings and low interest rates which, when combined, have produced an unusually speedy buildup of credit support in these deals, reports Moody’s analyst Joe Grohotolski. While this alone is not expected to lead to any negative rating implications Moody’s believes the trend will be more prevalent than 1999 to 2001. From a credit risk standpoint the accumulation of excess credit enhancement is typically a positive, and the reduction to target levels is a structural feature that Moody’s incorporates into ratings.Fitch Ratings has assigned an ‘AAA’ rating to CWMBS Inc.’s $86.1 million mortgage pass through certificates series 2003-30 Alternative Loan Trust (ALT) 2003-12CB classes 1-A, 2-A-1, PO and A-R (senior certificates). The ratings reflect level of subordination and credit enhancement. The certificates are split into two pools of 30-year and 15-year fixed-rate mortgage loans secured by first liens on one- to four-family residential properties with original loan-to-value (LTV) ratios ranging from 73.2% to 60.7% and weighted average FICO scores in the range of 721 to 724.

The residential primary servicer rating for the Alt-A product of PCFS Mortgage Resources — formerly known as PCFS Financial Services — has been upgraded to ‘RPS2-‘ by Fitch, which has also affirmed the company’s subprime product servicer rating at ‘RPS2-‘. The ratings reflect the company’s yearlong efforts and multimillion dollar investment to upgrade and consolidate the servicing platform’s management, technology and organizational structure. PCFS is a division of Provident Bank, which is a subsidiary of Cincinnati-based Provident Financial Group.

A rating of ‘Aaa’ has been assigned by Moody’s to Classes 3-A, 4-A and A-R of Countrywide‘s CWABS 2003-2 $728.5 million certificates. The subordinate classes have been rated ‘Aa2’ to ‘Baa2’. The quality of collateral, overcollateralization and credit enhancement influenced the rating. The loans also benefit from loan-level mortgage insurance coverage provided by PMI Mortgage Insurance Co. on a majority of the mortgage loans, which reduce the risk to approximately that of a fixed-rate “alternative-A” mortgage pool.

Fitch has rated ‘AAA’ First Horizon Asset Securities $288.8 million mortgage pass-through senior certificates series 2003-AR2 classes I-A-1, II-A-1, II-A-R and III-A-1 reflecting level of subordination, quality of collateral and credit enhancement. The certificates are broken into three pools of conventional, fully amortizing, adjustable-rate mortgage loans secured by first liens of one- to four-family residential properties with original LTV ratios between 67.55% and 63.51%.

The Florida Housing Corp.’s $50 million homeowner mortgage revenue bonds 2003 series 1 and 2 have been rated ‘AA’ by Fitch, which has also rated ‘AA/F1+’ the $55 million homeowner mortgage revenue bonds 2003 series 3 and 4.The ‘AA’ rating on $680.7 million outstanding homeowner mortgage revenue bonds has been affirmed. The ratings reflect the current portfolio, sufficient levels of mortgage insurance and levels of reserves and liquidity. Nearly half of the outstanding whole loan balance is Federal Housing Administration (FHA) insured, 12.5% is guaranteed by the U.S. Dept. of Veterans Affairs and 4.5% is guaranteed by the U.S. Dept. of Agriculture through its Rural Development Guaranteed Rural Housing Program.

Moody’s has assigned a rating of ‘Aaa’ to the $733 million senior certificates in UBS Warburg’s MASTR Asset Backed Securities Trust 2003-WMC1, a securitization backed by adjustable (77%) and fixed-rate (23%) subprime mortgage loans recently originated by WMC Mortgage Corp. Moody’s has also rated the subordinate certificates from ‘Aa2’ to ‘Baa3’. Moody’s said the stronger characteristics of the pool include a better than average FICO score of 637 and a higher than average original LTV of 83%. The ratings are based on the quality of the loans, subordination, overcollateralization and excess spread.

The $258.6 million of senior certificates issued in Delta Funding Corp.’s securitization of subprime mortgage loans, Renaissance Home Equity Loan Trust 2003-1, have been rated by ‘Aaa’ by Moody’s while the subordinated classes of certificates have been rated from ‘Aa2’ to ‘Baa2’. All ratings reflect credit enhancement provided through a combination of excess spread, overcollateralization and excess spread. The underlying loans consist of about 73% of fixed-rate mortgage and 27% of adjustable-rate mortgage loans with an average FICO score of 618 and an average combined LTV of 77%, which Moody’s said is stronger compared to that of a typical subprime pool.

Certain classes of certificates in the $433.1 million MASTR Alternative Loan Trust 2003-3 have been rated ‘Aaa’, ‘Aa3’, ‘A3’, ‘Baa3’ and ‘Ba3’ by Moody’s. Securing the certificates are Alternative A (Alt A) 30-year fixed-rate mortgages purchased from several originators by Mortgage Asset Securitization. The ratings reflect expected performance of the mortgages and credit enhancement provided by subordination of the mezzanine and subordinate certificates. The mortgage pool carries a weighted average FICO score of 701, which Moody’s indicated is weaker that recent average Alt A pools. But the original LTV of 77% is comparable to other such pools.

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at:

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