Outlook Varies for CMBS and Nonconforming RMBS

Standard & Poor’s Ratings Services said it estimates a home-price decline of 33 percent from 2006 to 2009 when forecasting losses on RMBS, which translates into a 19 percent loss on the mortgages. This reflects the impact of a foreclosure on the value, including the borrower’s lack of maintenance on the property and the servicer’s willingness to let a property go more quickly for less than the market value.

In addition to the 19 percent loss due to declining market value, S&P assumes another 26 percent in losses for foreclosure costs, including interest, property taxes, maintenance and real estate commissions. Foreclosure costs factor in around 600 days from default to liquidation.

Fitch Ratings downgraded one class of Morgan Stanley mortgage pass-through certificates, series 2002-AM3. Delinquency of at least 60 days on the subprime transaction is 18.5 percent.

Alt-A RMBS performance has rapidly deteriorated because of the contraction in available capital, home-price declines and risk layering, Fitch said. Loans with a simultaneous seconds are seeing delinquency as much as 300 percent higher than those without seconds. Hybrid adjustable-rate mortgages are among the worst-performing loan types, while option-ARM performance perform well initially then deteriorate by the 18th month.

Moody’s Investors Service downgraded the following Alt-A tranches due to higher-than-anticipated rates of delinquency, foreclosure, and REO in the underlying collateral relative to credit enhancement levels:

• 29 tranches from 13 Alt-A transactions issued by Residential Asset Securitization Trust from 2005 to 2007;
• 11 tranches from 17 Alt-A transactions issued by First Horizon from 2005 to 2007; and
• four tranches from Deutsche Alt-A Securities Mortgage Loan Trust, series 2007 RAMP1.

Fitch downgraded the following collateralized-debt obligation notes:

• seven classes of notes for $1.8 billion issued by Jupiter High-Grade CDO III, Ltd. in 2005 and Jupiter High-Grade CDO III issued in 2007;
• five classes of notes for $1.5 billion issued by Davis Square Funding III issued in 2004;
• four classes of notes for $0.4 billion issued by South Coast Funding II, Ltd. in 2002;
• four classes of notes for $0.1 billion issued by Pacific Bay CDO, Ltd. in 2003;
• three classes of notes for $0.1 billion issued by Millstone Funding Ltd in 2004; and
• three classes of notes for $0.1 billion issued by South Coast Funding VI, Ltd. in 2004.

S&P reported CMBS delinquencies have begun a modest uptick. Rental growth rates are slowing, and retail vacancies are up 20 to 30 basis points — though rents are still expected to continue rising. Property prices are expected to decline between 15 and 20 percent over the next few years.

“Absent a prolonged, severe recession, we think that the commercial real estate market is likely to avoid a 1989-1992 type ‘disaster’ scenario,” S&P said. “Property market fundamentals, though softening, by and large remain quite healthy nationally, with selected pockets of weakness.”

The primary CMBS servicer rating of Prudential Asset Resources was upgraded to CPS2+ from CPS2 by Fitch due to the stability of the servicing team, Prudential’s strong employee training program, and its continued implementation of strong technology.

Among CMBS downgrades by Moody’s were three classes for $33 million of COMM 2006-C8 commercial mortgage pass-through certificates and two classes for $34 million of Wachovia Bank Commercial Mortgage Trust, commercial mortgage pass-through certificates, series 2004-WHALE 4.

Moody’s upgraded one class for $24 million of J.P. Morgan Chase Commercial Mortgage Securities Corp. commercial mortgage pass-through certificates, series 2002-C3.

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

e-mail: mtgsam@aol.com