Approximately $22.4 Million of Structured Securities Affected
New York, December 15, 2010 -- Moody's has downgraded one class of Notes issued by Freddie Mac Multifamily
Variable Rate Certificates Series M017 due to the deterioration of certain
assets and the related increased default probability, and increased
asset correlations. The rating action is the result of Moody's
on-going surveillance of commercial real estate collateralized
debt obligation (CRE CDO) transactions.
Cl. B, Downgraded to B2 (sf); previously on Sep 29,
2008 Assigned Ba1 (sf)
Freddie Mac Multifamily Variable Rate Certificates Series M017 is a CRE
CDO transaction backed by a portfolio of multifamily affordable housing
bonds. The bonds are issued by state and local government entities
and are secured by first liens on multifamily affordable housing properties
and certain other assets pledged by certain municipal and state housing
authorities, and government entities.
While there are no defaulted assets in the pool, there is considerable
stress on several of the assets in the portfolio. Five multifamily
properties (15.4% of the balance) have Moody's debt
service coverage ratios (DSCR) that are below 1.0X. In addition,
a total of 12 multifamily properties (23.7% of the balance)
have DSCRs less than 1.10X. Since the rated tranche is the
first-loss tranche, any loss given default will result in
Moody's has identified the following parameters as key indicators of the
expected loss within CRE CDO transactions: WARF, weighted
average life (WAL), weighted average recovery rate (WARR),
and Moody's asset correlation (MAC). These parameters are typically
modeled as actual parameters for static deals and as covenants for managed
WARF is a primary measure of the credit quality of a CRE CDO pool.
We have completed updated credit estimates for the non-Moody's
rated collateral. For non-CUSIP collateral, Moody's
is eliminating the additional default probability stress applied to corporate
debt in CDOROM® v2.6 as we expect the underlying non-CUSIP
collateral to experience lower default rates and higher recovery compared
to corporate debt due to the nature of the secured real estate collateral.
The bottom-dollar WARF is a measure of the default probability
within a collateral pool. Moody's modeled a bottom-dollar
WARF of 2,666 compared to 1,706 at last review. The
distribution of current ratings and credit estimates is as follows:
Aaa-Aa3 (8.5% compared to 10.5% at
last review), A1-A3(5.4% compared to 2.5%),
Baa1-Baa3 (1.8% compared to 28.6% at
last review), Ba1-Ba3 (6.4% compared to 25.5%
at last review), B1-B3 (11.3% compared to 20.4%
at last review), and Caa1-C (66.2% compared
to 12.4% at last review).
WAL acts to adjust the probability of default of the reference obligations
in the pool for time. Moody's modeled to a WAL of 25.7 years
compared to 28.0 years at last review.
WARR is the par-weighted average of the mean recovery values for
the collateral assets in the pool. Moody's modeled a fixed
WARR of 50.0% compared to 50.0% at last review.
MAC is a single factor that describes the pair-wise asset correlation
to the default distribution among the instruments within the collateral
pool (i.e. the measure of diversity). For non-CUSIP
collateral, Moody's is reducing the maximum over concentration stress
applied to correlation factors due to the diversity of tenants,
property types, and geographic locations inherent in the pooled
transactions. Moody's modeled a MAC of 0.0%
compared to 18.8% at last review. the high level
of default probability dispersion within the collateral names.
The principal methodologies used in these ratings were "CMBS: Moody's
Approach to Rating Static CDOs Backed by Commercial Real Estate Securities"
published in June 2004, and "Moody's Approach to Rating SF
CDOs" published in November 2010.
Further information on Moody's analysis of this transaction is available
on www.moodys.com. In addition, Moody's publishes
a weekly summary of structured finance credit, ratings and methodologies,
available to all registered users of our website, at www.moodys.com/SFQuickCheck
Moody's review incorporated CDOROM® v2.6, one of Moody's
CDO rating models, which was released on May 27, 2010.
The cash flow model, CDOEdge® v3.2, was used to
analyze the cash flow waterfall and its effect on the capital structure
of the deal.
Changes in any one or combination of the key parameters may have rating
implications on certain classes of rated notes. However,
in many instances, a change in key parameter assumptions in certain
stress scenarios may be offset by a change in one or more of the other
key parameters. Rated notes are particularly sensitive to changes
in recovery rate assumptions. Holding all other key parameters
static, changing the recovery rate assumption down from 50%
to 40% or up to 60% would result in average rating movement
on the rated tranches of 0 to 1 notches downward and 0 to 1 notches upward,
The performance expectations for a given variable indicate Moody's forward-looking
view of the likely range of performance over the medium term. From
time to time, Moody's may, if warranted, change these
expectations. Performance that falls outside the given range may
indicate that the collateral's credit quality is stronger or weaker than
Moody's had anticipated when the related securities ratings were issued.
Even so, a deviation from the expected range will not necessarily
result in a rating action nor does performance within expectations preclude
such actions. The decision to take (or not take) a rating action
is dependent on an assessment of a range of factors including, but
not exclusively, the performance metrics. Primary sources
of assumption uncertainty are the current stressed macroeconomic environment
and continuing weakness in the commercial real estate and lending markets.
Moody's currently views the commercial real estate market as stressed
with further performance declines expected in a majority of property sectors.
The availability of debt capital is improving with terms returning towards
market norms. Job growth and housing price stability will be necessary
precursors to commercial real estate recovery. Overall, Moody's
central global scenario remains "hook-shaped" for 2010
and 2011; we expect overall a sluggish recovery in most of the world's
largest economies, returning to trend growth rate with elevated
fiscal deficits and persistent unemployment levels.
Moody's Investors Service did not receive or take into account a third
party due diligence report on the underlying assets or financial instruments
related to the monitoring of this transaction in the past six months.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating 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.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service 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 the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's Downgrades One CRE CDO Class of Freddie Mac Multifamily Variable Rate Certificates Series M017
250 Greenwich Street
New York, NY 10007