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Use of Lender-Paid MI Growing in Subprime RMBS Deals

Use of Lender-Paid MI Growing in Subprime RMBS Deals

Recent subprime RMBS ratings news

September 30, 2003


Lender-paid residential mortgage insurance as a credit enhancement to the collateral underlying structured finance deals is a growing trend in the subprime market, according to a new report from Moody’s Investors Service.“The use of lender-paid mortgage insurance (LPMI) in the subprime market has seen sustained growth in recent years,” the rating agency said in a statement announcing the report. “When this form of credit enhancement is used in securitizations, the premium is paid out of the excess interest available from the underlying pool of mortgages.”

While the relative number of transactions using LPMI decreased in 2002 as insurance providers became more selective and started charging higher premiums, the original balance of deals securitized with insurance on a portion of the underlying loans kept increasing as insurance providers seem to have focused more on large issuers, Moody’s said.

Moody’s has also assigned a rating of ‘Aaa’ to the $1.5 billion in senior certificates of GMAC-RFC’s securitization of fixed-rate and adjustable rate subprime mortgage loans, RASC 2003-KS7. Moody’s also assigned ratings ranging from ‘Aa2’ to ‘Baa2’ to the Group I mezzanine certificates and ratings ranging from ‘Aa2’ to ‘Baa1’ to Group II. The ratings are based primarily on credit enhancement provided through a combination of primary mortgage insurance, excess spread, over- and cross-collateralization and level of subordination. Group I includes fixed-rate mortgage loans with an average FICO score of 62 and a loan-to-value (LTV) ratio of 78.75%, while the ARM loans in Group II have a 610 average FICO and an average LTV of 82%.

The Seven B classes from six ContiMortgage Home Equity Loan trust transactions have been downgraded by Standard & Poor’s (S&P) ratings services, reflecting decreased credit support percentages to the subordinate classes due to net losses that consistently exceed excess interest, resulting in an erosion of overcollateralization. “The dramatic increase in losses for these pools and most other ContiMortgage pools result from the servicer having charged off loans that were previously in loss mitigation where advances have now been deemed to be nonrecoverable,” S&P said in a written statement. “This trend is expected to continue in the near term as the portfolios’ loss characteristics continue to be reassessed.” Ratings were affirmed on the remaining 73 classes from 19 transactions reflecting adequate remaining credit support.

Fitch Ratings has assigned ratings ranging from ‘AAA’ to ‘BBB’ to the$393 IndyMac Home Equity Mortgage Loan Asset-Backed Certificates series SPMD 2003-A, reflecting the level of credit enhancement, increasing overcollateralization, and excess interest. The loans carry average original LTV ratios of approximately 77%.

Also rated by Fitch was the $400.6 million Ace Securities Corp. Home Equity Loan Trust 2003-HS1, with ratings ranging from ‘AAA’ to ‘BBB-‘ reflecting level of subordination, monthly excess interest, and target overcollateralization. The loans have weighted average FICO scores of 601 to 614 and carry weighted average original LTV ratios of 81.66% to 82.94%.

The senior classes of investor certificates in the $283.3 million MASTR Adjustable Rate Mortgages Trust 2003-2 have been rated ‘Aaa’ by Moody’s. The certificates are secured by Alternative-A 30-year adjustable-rate mortgages and carry a weighted average FICO score of 709 and an original LTV ratio of 73%. The ratings are based on expected performance of the mortgages and levels of credit enhancement and subordination.

Moody’s has also assigned a ‘AAA’ rating to the senior certificates issued in Countrywide Home Loans $495 million mortgage pass-through trust series 2003-37. Ratings of ‘Aa2’ to ‘Baa2’ were assigned to the subordinate transactions. The ratings reflect the credit quality of the loans, which Moody’s said in a statement, is “better than average for adjustable-rate prime quality mortgage loans.” The loans carry weighted average FICO scores of 716 and 722 for Group’s I and II respectively, and LTV ratios in both pools of 70%.

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

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