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10 Jul 2007
Moody's Downgrades Subprime First-Lien RMBS
New York, July 10, 2007 -- Moody's Investors Service today announced negative rating actions
on 431 securities originated in 2006 and backed by subprime first lien
mortgage loans. The negative rating actions affect securities with
an original face value of over $5.2 billion, representing
1.2% of the dollar volume and 6.8% of the
securities rated by Moody's in 2006 that were backed by subprime
first lien loans.
Of the 431 rating actions taken today, Moody's downgraded
399 securities and placed an additional 32 securities on review for possible
downgrade. One of the downgraded securities remains on review for
possible further downgrade. The vast majority of rating actions
taken today impacted securities originally rated Baa or lower.
The 239 securities originally rated Baa on which action was taken represented
19% of the total number of Baa ratings issued in 2006; the
185 securities originally rated Ba on which action was taken represented
42% of the total number of Ba ratings issued in 2006; and,
the 7 securities originally rated A on which action was taken represented
0.6% of the total number of A ratings issued in 2006.
No action was taken on securities rated Aaa or Aa.
Rating Actions Reflect Rigorous Review of All 2006 Subprime RMBS Deals
Nicolas Weill, Chief Credit Officer of Moody's Structured
Finance Group, said, "Moody's has been closely
monitoring all subprime RMBS securities as part of our ongoing ratings
process, and we began taking rating actions on securities issued
in 2006 and backed by poorly performing pools of subprime mortgage loans
in November 2006. Over the past three months, Moody's
has surveyed servicers, originators, intermediaries and other
market participants to get their perspective on the drivers of the 2006
vintage performance and their expectations about future losses.
Based on our analysis of pool performance, we undertook a rigorous
examination of all 2006 subprime RMBS deals -- including deals backed
by both first lien and second lien loans. The rating actions announced
today -- as well as those announced on June 15 -- are the result
of that review."
Overview of Factors Driving Rating Actions
Recent data shows that the first lien subprime mortgage loans securitized
in 2006 have delinquency rates that are higher than original expectations.
Those loans were originated in an environment of aggressive underwriting.
This aggressive underwriting combined with prolonged, slowing home
price appreciation has caused significant loan performance deterioration
and is the primary factor in these rating actions. In addition,
Moody's analysis shows that the transactions backed by collateral
originated by Fremont Investment & Loan, Long Beach Mortgage
Company, New Century Mortgage Corporation and WMC Mortgage Corp.
have been performing below the average of the 2006 vintage and represent
about 60% of the rating actions taken today.
Additional Findings From Moody's Review of 2006 Subprime RMBS First
Moody's has noted a persistent negative trend in severe delinquencies
for first lien subprime mortgage loans securitized in 2006. For
example, the 90+ day delinquency rate for loans securitized
in 2006 has increased from 7.9% in March 2007 to 10.8%
in May 2007. However, losses have remained relatively low,
with the May cumulative loss rate reaching only 0.30%.
As part of the recently completed review of all 2006 subprime RMBS,
Moody's said it examined the portion of each pool that was severely
delinquent -- that is, over 90 days past due, in foreclosure
or held as "real estate owned" -- and assessed
the amount of credit enhancement available to the rated tranches in the
form of subordination and excess spread. "Early defaulting
borrowers often exhibit distinct characteristics: they are more
likely to be first-time home buyers, speculators, or
are over-leveraged or have 80%-20% first-second
lien loan combinations," said Weill. Consequently,
the early defaulters may exhibit different behavior than other borrowers
in the pool. Those borrowers may face other challenges in the next
few months when rate and payment resets take effect, especially
in the absence of effective loan modifications.
In analyzing loans that are severely delinquent, Moody's said
it considered a number of scenarios based on various assumptions about
the percentage of currently delinquent loans that would eventually default
(the "roll rate") and the expected severity of loss given
default. The roll rates used were: for over 90 days delinquent:
50%, 75% and 90%; for those loans in foreclosure
and held as real estate owned: 95% and 100%.
While these roll rates are higher than those that have been realized historically,
Moody's believes that these loans, with their high vacancy
rates and high "no contact" rates, are more likely to
default than other subprime loans.
The severity rates Moody's assumed ranged from 25%-30%
(in particular, for deals with strong coverage from mortgage insurance),
to 40% (for most originators), to 50% for originators
whose mortgage assets are revealing particularly high severe delinquency
For the portion of each pool that is not severely delinquent, Moody's
increased its original loss expectations for the pool by a stress factor
of 20% which is consistent with the increased loss expectations
that the rating agency published in its March 2007 report: "Challenging
Times for the US Subprime Mortgage Market."
While we considered both the projected losses associated with the seriously
delinquent loans (the "pipeline losses") as well as the projected
losses associated with the remaining portion of the pool, we gave
more weight to the pipeline losses.
Moody's invites you to participate in a teleconference on Thursday,
12 July 2007 at 10:00 EST / 15:00 BST (local London time)
to discuss these actions. The call will be hosted by Richard Cantor,
Team Managing Director, Credit Policy Research Group; Nicolas
Weill, Team Managing Director and Chief Credit Officer, Asset
Finance; and John Park, Senior Vice President, Derivatives
Monitoring. Details of the call are as follows:
US and Canada +1 800.795.1259
All Others: +1 785.832.0301
For details on the conference call, as well as Moody's published
research on the subprime market, go to www.moodys.com/subprime.
Please contact Moody's Client Service Desk at +1.212.553.1658
with any other questions.
A press release detailing the specific securities whose ratings were affected
has been released and is available on moodys.com.
Managing Director - Chief Credit Officer
Structured Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
No Related Data.
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