New York, January 10, 2013 -- Moody's Investors Service has downgraded 19 tranches from two RMBS transactions
issued by J.P. Morgan Mortgage Trust 2004-S2 and
WaMu Mortgage Pass-Through Certificates, Series 2004-S2.
The collateral backing these deals primarily consist of first-lien,
fixed Jumbo residential mortgages. The actions impact approximately
$135.6 millions of RMBS issued in 2004.
Complete rating actions are as follows:
Issuer: J.P. Morgan Mortgage Trust 2004-S2
Cl. 1-A-3, Downgraded to Baa3 (sf); previously
on May 10, 2012 Upgraded to Baa1 (sf)
Cl. 1-A-7, Downgraded to Baa3 (sf); previously
on May 10, 2012 Upgraded to Baa1 (sf)
Cl. 5-A-1, Downgraded to Ba1 (sf); previously
on May 10, 2012 Confirmed at Baa2 (sf)
Cl. 6-A-1, Downgraded to Ba2 (sf); previously
on May 10, 2012 Confirmed at Baa3 (sf)
Cl. 6-A-P, Downgraded to Ba2 (sf); previously
on Apr 29, 2011 Downgraded to Ba1 (sf)
Cl. 3-B-1, Downgraded to Ca (sf); previously
on May 10, 2012 Downgraded to Caa3 (sf)
Cl. 2-B-2, Downgraded to Ca (sf); previously
on Apr 29, 2011 Downgraded to Caa3 (sf)
Cl. 1-B-2, Downgraded to Caa3 (sf); previously
on May 10, 2012 Upgraded to Caa1 (sf)
Cl. 4-A-1, Downgraded to Ba2 (sf); previously
on May 10, 2012 Confirmed at Ba1 (sf)
Cl. 4-A-2, Downgraded to Ba2 (sf); previously
on May 10, 2012 Downgraded to Ba1 (sf)
Cl. 4-A-3, Downgraded to B1 (sf); previously
on May 10, 2012 Confirmed at Ba1 (sf)
Cl. 4-A-4, Downgraded to Ba3 (sf); previously
on May 10, 2012 Confirmed at Baa3 (sf)
Cl. 4-A-5, Downgraded to Ba3 (sf); previously
on May 10, 2012 Confirmed at Baa3 (sf)
Cl. 4-A-6, Downgraded to Ba1 (sf); previously
on May 10, 2012 Confirmed at Baa3 (sf)
Cl. 4-A-P, Downgraded to B1 (sf); previously
on Apr 29, 2011 Downgraded to Ba2 (sf)
Issuer: WaMu Mortgage Pass-Through Certificates, Series
2004-S2
Cl. 2-A-5, Downgraded to Baa1 (sf); previously
on Jun 4, 2012 Confirmed at A2 (sf)
Cl. 2-A-6, Downgraded to Baa3 (sf); previously
on Jun 4, 2012 Confirmed at Baa2 (sf)
Cl. 3-A-2, Downgraded to Baa1 (sf); previously
on Jun 4, 2012 Upgraded to A1 (sf)
Cl. 3-A-3, Downgraded to Baa1 (sf); previously
on Jun 4, 2012 Upgraded to A1 (sf)
RATINGS RATIONALE
These actions reflect recent performance of the underlying pools and Moody's
updated loss expectations on the pools.
The actions also reflect correction of an error in the Structured Finance
Workstation (SFW) cash flow model used by Moody's in rating these transactions,
specifically in how the model handled interest shortfall allocation among
different sub-pools in transactions with a double-ratio
strip.
Double-ratio strip transactions are deals where a pool of collateral
with a varied mortgage rates supports two (or more) groups of senior bonds
with fixed coupon rates, one with a high coupon rate and one with
a low coupon rate. To support this feature, the pool is divided
into subgroups. All underlying loans with rates at or below the
bond with the lower coupon are placed in one subgroup and all loans with
rates higher than the bond with the higher coupon are placed in another
subgroup. Loans with a net loan rate between the two rates are
hypothetically split and allocated in different proportions to the two
sub-pools so that the weighted average rate of each sub-pool
matches the rate on the respective bonds.
In the past, our model commingled the principal and interest collections
from these sub-pools before allocating funds to the respective
senior bonds, first as interest and then as principal. Under
normal circumstances, this simplifying assumption works fine.
However, in the current environment of large rate modifications,
the interest and principal collections are not enough to pay the scheduled
interest and principal on the senior bonds. Therefore, interest
is first being paid in full to all senior bonds and the remaining funds
are distributed as principal, resulting in a principal shortfall.
Commingling funds results in allocating the principal shortfall pro-rata
to the bonds. This pro-rata allocation is inaccurate because
the underlying loans that were modified were not split pro-rata
into the sub-pools. Higher rate loans, which are more
prone to rate modification, by design back the sub-pools
with higher target rates. Allocating the principal shortfall pro-rata
is thus detrimental to bonds backed by the lower target-rate sub-pool
and beneficial to bonds backed by the higher target-rate sub-pool.
Our updated modeling first allocates interest shortfalls by scaling the
actual interest collected compared to the target interest that is to be
received under normal circumstances, before distributing the available
funds. This approach thus keeps track of the level of principal
shortfall resulting from each sub-pool, and discriminates
between the bonds backed by the different net rate sub-pools.
However, the actions taken today are driven by performance of the
individual pools. The correction in the model did not result in
a rating change.
The methodologies used in these ratings were "Moody's Approach to Rating
US Residential Mortgage-Backed Securities" published in December
2008, and "Pre-2005 US RMBS Surveillance Methodology" published
in January 2012. The methodology used in rating Interest-Only
Securities was "Moody's Approach to Rating Structured Finance
Interest-Only Securities" published in February 2012.
Please see the Credit Policy page on www.moodys.com for
a copy of these methodologies.
Moody's adjusts the methodologies noted above for 1) Moody's
current view on loan modifications and 2) small pool volatility
Loan Modifications
As a result of an extension of the Home Affordable Modification Program
(HAMP) to 2013 and an increased use of private modifications, Moody's
is extending its previous view that loan modifications will only occur
through the end of 2012. It is now assuming that the loan modifications
will continue at current levels until the end of 2013.
Small Pool Volatility
The above mentioned approach is also adjusted slightly when estimating
losses on pools left with a small number of loans to account for the volatile
nature of small pools. Even if a few loans in a small pool become
delinquent, there could be a large increase in the overall pool
delinquency level due to the concentration risk. To project losses
on pools with fewer than 100 loans, Moody's first estimates a "baseline"
average rate of new delinquencies for the pool that varies from 3%
to 10% on average. The baseline rates are higher than the
average rate of new delinquencies for larger pools for the respective
vintages.
Once the baseline rate is set, further adjustments are made based
on 1) the number of loans remaining in the pool and 2) the level of current
delinquencies in the pool. The volatility of pool performance increases
as the number of loans remaining in the pool decreases. Once the
loan count in a pool falls below 75, the rate of delinquency is
increased by 1% for every loan less than 75. For example,
for a pool with 74 loans with a base rate of new delinquency of 3.00%,
the adjusted rate of new delinquency would be 3.03%.
In addition, if current delinquency levels in a small pool are low,
future delinquencies are expected to reflect this trend. To account
for that, the rate calculated above is multiplied by a factor ranging
from 0.75 to 2.5 for current delinquencies ranging from
less than 2.5% to greater than 10% respectively.
Delinquencies for subsequent years and ultimate expected losses are projected
using the approach described in the "Pre-2005 US RMBS Surveillance
Methodology" publication.
The primary source of assumption uncertainty is the uncertainty in our
central macroeconomic forecast and performance volatility due to servicer-related
issues. The unemployment rate fell from 9.0% in September
2011 to 7.8% in December 2012. Moody's forecasts
a further drop to 7.5% by 2014. Moody's expects
house prices to drop another 1% from their 4Q2011 levels before
gradually rising towards the end of 2013. Performance of RMBS continues
to remain highly dependent on servicer procedures. Any change resulting
from servicing transfers or other policy or regulatory change can impact
the performance of these transactions.
A list of these actions including CUSIP identifiers may be found at:
Excel: http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF312673
A list of updated estimated pool losses and sensitivity analysis is being
posted on an ongoing basis for the duration of this review period and
may be found at:
Excel: http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF243269
For more information please see www.moodys.com.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Information sources used to prepare each of the ratings are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's Analytics
information.
Moody's received and took into account one or more third party assessments
on the due diligence performed regarding the underlying assets or financial
instruments in these transactions and the assessments had a neutral impact
on the rating.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
In addition to the information provided below please find on the ratings
tab of the issuer page at www.moodys.com, for each
of the ratings covered, Moody's disclosures on the lead rating
analyst and the Moody's legal entity that has issued each of the
ratings.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Max Sauray
Associate Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Debashish Chatterjee
Associate Managing Director
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Downgrades $135.6M of Jumbo RMBS Issued by JP Morgan and WaMu in 2004
