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Avalanche of Downgrades

Avalanche of DowngradesMoody’s takes actions on 558 subprime transactions

July 10, 2007


Residential mortgage-backed securities backed by second mortgages have been swept up in an avalanche of negative subprime ratings actions today. The majority of the actions occurred on transactions originated by just four companies.

Moody’s Investors Service announced it took negative ratings action on 431 transactions securitized last year and backed by subprime first mortgages. The aggregate value of the RMBS affected is more than $5.2 billion and represents 1.2 percent of Moody’s 2006 rated transactions.

Downgrades accounted for 399 of the actions, while the remaining were placed on review for possible downgrades, according to the New York-based ratings agency. Most of the ratings actions impacted securities originally rated Baa or lower.

In addition, Moody’s took negative action on 127 subprime second mortgage transactions with aggregate original face values of $1.6 billion. Most were issued during the second half of 2005.

The actions were attributed to unexpected delinquency that has arisen from aggressive underwriting on 2006 mortgages combined with slowing appreciation, Moody’s explained.

“Transactions backed by collateral originated by Fremont Investment & Loan, Long Beach Mortgage Co., New Century Mortgage Corp. and WMC Mortgage Corp. have been performing below the average of the 2006 vintage and represent about 60% of the rating actions taken today,” the statement said.

Moody’s actions follow a similar move from earlier today by Standard & Poor’s on 612 subprime RMBS classes from 2006 and late 2005 totaling $12.1 billion.

“We began taking rating actions on securities issued in 2006 and backed by poorly performing pools of subprime mortgage loans in November 2006,” said Moody’s Chief Credit Officer Nicolas Weill in the statement. “We undertook a rigorous examination of all 2006 subprime RMBS deals — including deals backed by both first lien and second lien loans.”

Following S&P’s announcement today, stocks tumbled — with the Dow Jones Industrial Average closing down nearly 150 points.

One bright spot is the upgrade by Moody’s of 52 securities backed by seconds for approximately $1 billion due to faster-than-expected loan prepayments.


Flood of Subprime RMBS Downgrades
More than $12 billion subprime residential mortgage-backed securities may see their ratings cut by Standard & Poor’s — which is revising its methodology.


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


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