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Billions in Subprime Securities Downgraded

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Billions in Subprime Securities Downgraded

Recent MBS ratings activity

November 27, 2007



photo of Coco Salazar
An update to loss forecasting assumptions led to negative ratings actions on over $1 billion in subprime securitizations, while more than $5 billion in collateralized debt obligations saw negative actions being of credit deterioration at the issuers. Meanwhile, another $30 billion in CDOs was downgraded due to credit deterioration in underlying collateral and changes to the default forecasting assumptions.

Fitch Ratings announced it initiated a formal review of CDOs entirely or partly backed by trust preferred securities issued by real estate investment trusts, homebuilders and residential mortgage lending financial institutions. Factors prompting the review were that the credit profiles of many of these issuers continue to decline; Fitch’s Negative Rating Outlook on the homebuilder, residential and commercial mortgage REIT sectors; and that “challenges facings these sectors are expected to be even more pronounced with respect to the smaller-sized, shadow-rated entities which typically characterize REIT TruPS CDO portfolios.”

As a result, Fitch said it placed $5.4 billion of rated liabilities, across 120 classes of 15 TruPS CDOs, on Rating Watch Negative. The affected issuers are Attentus CDO I, Ltd./LLC, as well as Attentus II and III; Kodiak CDO I and II, Ltd./Inc.; Taberna Preferred Funding I through VII, Ltd; and Trapeza CDO X and XI, Ltd./Inc. Five of the deals had their entire capital structure placed on review for possible downgrade. An estimated average 23 percent of the underlying portfolios are currently rated CCC+ or below. Plus, six underlying issuers, including a homebuilder that filed for bankruptcy protection on Nov. 9, that represent a total exposure of over $0.5 billion have been identified as exhibiting heightened credit risk since the last review in September.

Classes currently rated AAA and AA are expected to remain in the investment grade range despite possible downgrades, which will reflect increased probability of default as opposed to an expectation of a principal loss to noteholders. More junior classes are anticipated to have more pronounced ratings actions, reflecting an increased expectation of potential principal loss to noteholders as a result of collateral defaults and deterioration, Fitch said.

Derivative Fitch announced Wednesday it downgraded close to $30 billion of structured finance CDOs across 74 transactions after reviewing all cash and synthetic SF CDOs with exposure to U.S. residential mortgage-backed securities that had been on Rating Watch Negative. A global review of SF CDOs resulted in total downgrades of $67 billion within 158 deals.

The negative actions on the $30 billion were based on continued credit deterioration in underlying collateral and changes to the default forecasting assumptions in Fitch’s Default VECTOR Model that reflect increased probabilities of default, reduced recovery assumptions and increased correlation with respect to recent vintage subprime RMBS and SF CDOs.

In response to one of the downgrades, Security Capital Assurance Ltd announced that the portion it insures on one of its SF CDOs, approximately $573 million net par, is supported by an additional 5 percent subordination that was not reflected in the downgrade Fitch made to BBB- from AAA.

Subprime loss forecasting assumptions Fitch updated to better capture deteriorating performance reportedly led to downgrades on over $695 million and placement on review for potential downgrade on about $27 million in classes of Long Beach mortgage pass-through certificates Series 2005-2, 3, WL2, and WL3; possible downgrades for $22 million of Equifirst Mortgage Loan Trust series 2005-1; and downgrades on classes worth $51 million of Fremont Home Loan Trust mortgage pass-through certificates, series 2005-1, which has 60+ day delinquency of almost 33 percent.

Such update also affected Meritage Mortgage Corp. asset-backed certificates 2005-2 through over $14 million in ratings downgrades and close to $18 million placed on review for possible downgrade; UBS MASTR Asset Backed Securities Series 2005-NC1 with $3 million downgraded and nearly $55 million facing potential lower ratings; Residential Asset Securities Corporation 2005-KS1, KS4 and KS6 through more than $19 million in ratings downgrades; $31.1 million in classes from GS Mortgage Securities Corp. 2005-HE3; $39.5 million in classes from Ameriquest mortgage pass-through certificates Series 2005-R3 Series 2005-R5; and $56.9 million in classes of second lien-backed SACO mortgage pass-through certificates series 2005-4 and 2005-WM1, Fitch reported.

Meanwhile, a deteriorating relationship between credit enhancement and expected losses was the reason cited by Fitch for downgrades to nearly $77 million of People’s Choice Series 2004-2, which has overcollateralization $2.2 million below the target of $3.7 million; lower ratings on about $26 million of RASC, Series 2003-KS3 Total Group 1 & 2, 2004-KS3 Total 2-3, 2004-KS8 Group 2, and 2004-KS11; downgrades on nearly $15 million of IndyMac ABS Inc. Home Equity Series SPMD 2000-A Group 2 and SPMD 2001-B Groups 1 & 2; downgrades to $17.5 million in classes of Credit Suisse First Boston Home Equity Asset Trust series 2002-5; and downgrades on about $16 million worth of classes in Long Beach Mortgage Loan Trust, Series 2003-2 and 2004-2.

Moody’s Investors Service announced that higher-than-anticipated rates of delinquency, foreclosure, and real estate owned in collateral relative to credit enhancement levels prompted it to downgrade 20 tranches Opteum Mortgage Acceptance Corporation Asset Backed Pass-Through Certificates 2005-5, 2006-1 and 2006-2; two classes of Sequoia Alternative Loan Trust 2006-1; and two tranches from SunTrust Alternative Loan Trust 2006-1F. All of these deals also had some classes placed on review for possible downgrade.

Other Alt-A loan-backed deals that saw worse ratings on classes due to that reason were Prime Mortgage Trust 2006-CL1 and 2005-5; Wells Fargo Alternative Loan 2005-2 Trust; Wachovia Mortgage Loan Trust, Series 2006-ALT1 and AMN1; WaMu Mortgage Pass-Through Certificates, WMALT Series 2005-10 Trust, 2006-6 Trust, 2006-7, 2006-8, 2006-9 Trust, 2006-4 Trust, 2006-5 Trust, and 2006-AR10 Trust; and Residential Asset Securitization Trust 2005-A15, 2006-A7CB, 2006-A8, 2006-A9CB.

Scratch and dent mortgage-backed deals that reportedly received lower ratings by Moody’s on certain classes because the proportion of severely delinquent loans has been increasing while the amount of available credit enhancement has been reduced from losses and stepdown are Countrywide Home Loan Trust 2004-SD1 and SD2, Truman Capital Mortgage Loan Trust 2004-1 and 2, RFSC Series 2004-RP1 Trust, and Morgan Stanley ABS Capital I Inc. Trust 2004-SD1 through SD3. Moody’s cited only reduced credit enhancement from losses and stepdown as the reason behind lower ratings on two classes of Structured Asset Securities Corp Trust 2004-GEL1.

Moody’s cited reduced available credit enhancement and passing of performance triggers that led to diminished protection available to the subordinate bonds in its downgrade of one tranche of CSFB 2004-CF1 — also a scratch and dent deal.

But there was at least one bit of good news.

Fitch announced it upgraded Universal Master Servicing LLC’s residential master servicer rating to RMS2- from RMS3+ based on the company’s servicing ability and the financial strength of Wachovia Bank N.A., majority owner of Universal.

Coco Salazar is an associate editor and staff writer for

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