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Subprime Losses Accelerate

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Subprime Losses AccelerateMoody’s projects 1-in-4 subprime loans from 2005, 2006 & 2007 will default

February 26, 2009

By staff

Nearly three-out-of-four subprime loans backing securitizations issued in 2005, 2006 and 2007 are expected to ultimately default. The resulting increase in expected losses has prompted downgrade warnings on nearly $700 billion in subprime residential mortgage-backed securities.Moody’s Investors Service, said today that losses on subprime loans backing 2007 vintage securitizations are expected to be between 33 and 37 percent.

Losses on subprime transactions issued in 2006 are expected to fall between 28 percent and 32 percent, up from the prior estimate of 22 percent. Delinquency of at least 60 days, including foreclosures, on the 2006 subprime vintage currently stands at 42 percent. Moody’s estimates that one-third of subprime borrowers from the 2006 vintage who are current now will default by yearend.

The bleak assessment of 2006 issuances reflected the deteriorating loan-to-values.

Moody’s said 2005 issuances are expected to generate losses ranging from 12 percent to 14 percent.

Rising loss severities on liquidated loans, persistent elevated default rates and Moody’s expectation that home prices will slide another 15 percent were cited for the increased loss estimates. Progressively diminishing prepayment rates — as well as the inability of subprime borrowers to refinance during the next few years — were also factors.

The New York-based firm expects that overall defaults on subprime loans backing loans issued from 2005 through 2007 will ultimately reach 72 percent.

The revised loss estimates prompted Moody’s to place 7,942 subprime RMBS tranches for $680 billion on review for a possible downgrade.

Moody’s noted that it preliminarily factored in a mitigating impact from the Homeowner Affordability and Stability Plan — which was announced last week by the Obama administration.

Lifetime projected losses were determined first by estimating delinquency losses for this year assuming there is no government intervention. Then losses are estimated for the remaining life of the deal. Finally, Moody’s analyzes the impact of modifications and other government support on each deal.

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