Ratings Activity Still Heavy

Moody’s Investors Service placed on review for possible upgrade ratings of seven tranches issued by Centex Home Equity Co. Loan Trust 2004-1. The agency noted the underlying subprime loan collateral has experienced lower-than-anticipated cumulative losses to date, and existing credit enhancement levels are high given the current level of delinquency in the underlying pools.

Classes of GSAA Trust 2004-NC1 and New Century Home Equity Loan Trust, Series 2004-2, which are both backed by subprime loans originated by New Century Mortgage Corp., were upgraded by Moody’s due to the strong build up of credit enhancement.

But Moody’s reportedly downgraded classes of Asset Backed Securities Corporation Home Equity Loan Trust 2004-HE1 and 2004-HE2; Carrington Mortgage Loan Trust, Series 2004-NC1; GSAMP Trust 2004-NC1; Morgan Stanley ABS Capital I Inc. Trust, series 2004-NC1, 2004-NC4 and 2004-NC6; New Century Home Equity Loan Trust, Series 2004-1 and Series 2004-3; and Securitized Asset Backed Receivables LLC Trust 2004-NC1. The actions on the deals, all backed by New Century originations, were based on current and projected pipeline losses compared to the available levels of enhancement.

Downgrades are possible for the ratings of two tranches issued by Amortizing Residential Collateral Trust Mortgage Pass-Through Certificates Series 2004-1. Moody’s said the recent pace of losses has completely eroded overcollateralization.

Classes of Aames Mortgage Trust Series 2001-4 and Morgan Stanley Dean Witter Capital I Inc. Trust Series 2002-AM2, both backed by Aames originations, were placed on review for downgrade by Moody’s because existing credit enhancement levels may be low given actual and projected losses.

Moody’s also said it placed classes of Sequoia Mortgage Trust, Mortgage Pass-Through Certificates, Series 2004-4, Series 2004-5, Series 2004-6, Series 2004-7 and Series 2004-9 on review for upgrade because of subordination relative to expected losses on the ARM backed deals.

Classes of GE Capital Mortgage Services, Series 1998-HE2 received lower ratings from Moody’s. The actions on the fixed-rate subprime loan deal were reportedly based upon recent losses and diminishing credit enhancement levels relative to the current projected losses on the underlying pools.

One class of subprime loan-backed Meritage Mortgage Loan Trust, Series 2003-1 saw a downgrade by Moody’s because existing credit enhancement levels may be low given the current projected losses on the underlying pools. The losses have deteriorated overcollateralization, causing subordinated certificates to start receiving their share of unscheduled prepayments, and the severity of loss on liquidated loans has begun to increase, Moody’s noted.

Furthermore, a recent report by Moody’s highlighted that the fallout from aggressive underwriting and a prolonged housing downturn continues to contribute to poor collateral performance and early defaults in loans backing RMBS originated in 2006 and will keep putting negative ratings pressure on a number of U.S. subprime and Alt-A tranches.

In January, Moody’s warned that early defaults were rising among late-2005 and early 2006-vintage subprime RMBS collateral. The new data showed six-month default rates have continued to rise significantly for loans backing RMBS issued in the third and fourth quarters of 2006 — and this trend is also evident in 12-month default rates.

Twelve-month collateral defaults for 2006 subprime RMBS rose to 7.39 percent, compared to the 2% average for deals issued between the first quarter 2002 through the second quarter 2005. Six-month collateral defaults among fourth quarter 2006 subprime RMBS reached 3.54 percent, up from the average of 0.90 percent in the same comparison period. To date, Moody’s has downgraded or placed on review for possible downgrade about 3 percent or 496 of its rated first-lien MBS issued in 2006.

Sovereign Advisers stated that the recent credit implosion could have been avoided had the Securities and Exchange Commission acted on a Congress chairman’s request in 2005 for an investigation into the unregulated business practices of the international credit rating agencies, according to an announcement.

Sovereign blamed most of the subprime meltdown on the sale and subsequent default of “investment-grade” mortgage bonds carrying “artificial” triple-A assigned by Standard and Poor’s, Moody’s and Fitch. The agencies intentionally concealed the true credit risk to make the bonds more appealing, inducing financial institutions, including hedge funds in the United States, Europe and Asia, into purchasing the bonds, Sovereign said. The firms habitually hide the true risk to boost the fees they charge to companies and governments seeking a rating in order to sell bonds.

“Far from representing a deception perpetrated on an unprecedented scale, this latest debacle represents only the most recent instance in a long and unenviable history of questionable practices by the credit rating firms, the true nature of which are only now becoming exposed,” the announcement stated.

While belated, Congress has realized the pressing need for legislative action in order to restore the transparency and integrity of the U.S. capital markets, Sovereign said.

In the world of collateralized debt obligations, Fitch Ratings announced it downgraded $1.2 billion in rated notes and preference shares of 11 CDOs due to exposure to trust preferred securities and senior and subordinated debt issued by mortgage-lending real estate investment trusts, homebuilders and financial institutions. The affected CDOs were Attentus CDO I, II, and III; Kodiak CDO I; TABERNA Preferred Funding II through VII; and TRAPEZA CDO X.

The downgrades on the 46 tranches of the CDOs reflect rapid deterioration in the credit and liquidity profiles of a number of the mortgage-lending entities. In addition to four filing bankruptcy — New Century Financial Corp., American Home Mortgage Investment Corp., HomeBanc Corp. and First Magnus Financial Corp. — the public and shadow ratings of many underlying issuers also experienced material negative migration, Fitch noted.

Fitch downgraded a $30 million class of notes issued by Brit Alliance ABSpoke 2005-X as a result of deterioration in the credit quality of the unfunded managed synthetic CDO’s reference portfolio of $62 million in various ABS assets. The deal is designed to provide credit protection for realized losses on the reference portfolio through a credit default swap between the issuer and the swap counterparty, Morgan Stanley Capital Services Inc. The credit default swap references prime and subprime RMBS, according to an announcement.

The same reason was cited by Fitch for the downgrade on a $35 million class of Brit Alliance ABSpoke 2005-XI, which references a $673 million portfolio and involves credit default swap references of RMBS, ABS, and CMBS.

Fitch reported it lowered ratings on a $20 million class of notes issued by Enhanced Mortgage-Backed Securities V Ltd. because of the likelihood investors will be paid in full. The transaction was a mortgage market value CDO managed by Babson Capital Management LLC that violated over-collateralization tests and had its portfolio liquidated.

Moody’s said it will immediately modify assumptions to its expected loss inputs of certain first lien subprime RMBS assets going CDO transactions. The move was taken in light of expectations for continued ratings deterioration among recent vintage subprime RMBS.

In commercial, $28 million in a class of CDO Prima Capital CRE Securitization 2006-1, Ltd./Corp. was upgraded due to an improvement in the credit quality of the portfolio, the deleveraging of the capital structure, and the amortization of underlying collateral.

Fitch announced it upgraded $111 million in certificates of Greenwich Capital Commercial Mortgage Trust, series 2004-GG1 because there was additional paydown and defeasance, of almost 1 percent and 20 percent, respectively, in the deal since the last rating action in January.

About $96 million or four classes of GE Capital Commercial Mortgage Corp., Series 2001-1 received improved ratings from Moody primarily due to an increased percentage of defeased loans, according to an announcement.

Moody’s said it gave higher ratings to about $76 million or five classes of Bear Sterns Commercial Mortgage Securities Trust, Series 2002-PBW1 as a result of increased credit support, defeasance and stable overall pool performance.

Better ratings were also issued to a $48 million class of N-45° First CMBS Issuer Corp., Commercial Mortgage-Backed Bonds, Series 2003-3, Moody’s said, noting that the three loans backing the deal have continued to benefit from amortization on a 25-year schedule, with their pooled loan-to-value ratio decreasing since the last review and securitization.

Moody’s said it knocked down ratings on about $175 million in classes of Credit Suisse First Boston Mortgage Securities Corp., Series 2005-CND2, which is collateralized by two loans on two properties undergoing conversion intended for residential condos. The lower ratings on classes H, J, K, L, M and N were based on performance issues on the loans and their November 2007 maturity.

Moody’s announced it upgraded $701 million in five classes of Bear Sterns Commercial Mortgage Securities Trust, Commercial Mortgage Pass-Through Certificates, Series 2002-PBW1. The deal, backed by 108 loans, has not experienced any losses since securitization while no loans are in special servicing.