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Announcement:

Moody's: Loan modification program to be executed by ABC Capital in Mexican RMBS CREYCB 06U and 06 -- 2U could be credit positive or negative, depending on implementation

16 May 2013

Mexico, May 16, 2013 -- Moody's de México S.A. de C.V. (Moody's) announced today that the loan modification program to be implemented by ABC Capital, S.A. Institución de Banca Múltiple (ABC) in connection with the CREYCB 06 and 06-2U certificates could have a credit positive impact on the transaction, because it could turn highly delinquent loans into performing, cash flowing collateral. However, depending on how the servicer implements the program and on the future performance of the modified loans, the effect on the transaction could be negative, increasing severity of the loss.

Moody's will continue to monitor the transaction's performance to assess impact of the loan modification program once implemented.

Currently, Moody's rates the senior certificate (CREYC 06U) B3 (sf) (Global Scale, Local Currency) and B1.mx (sf) (National Rating Scale), and the subordinated certificate (CREYCB 06-2U) Ca (sf) (Global Scale, Local Currency) and Ca.mx (sf) (National Rating Scale). The ratings were placed on review for possible downgrade based on rising concerns about the potential for high severity of loss on defaulted loans. Please refer to the press release published on February 22, 2013 titled "Moody's places ratings of 18 Mexican Sofol RMBS certificates on review for downgrade".

Investors in this transaction have approved the loan modification program to be implemented by the servicer, ABC. This program intends to have some of the loans start cash flowing again by providing loan modifications that may entail principal haircuts of up to 30%. Given that 43% of the current pool was more than 180 days past due as of February 2013, and the timing of the foreclosure process and sale in Mexico is anticipated to be protracted, the implementation of the loan modification program is expected to improve the credit profile of the transaction. However, if the program is not implemented judiciously, or if the re-default rate of modified loans is high, loan severities could increase above the severities currently expected if the loan goes through the judicial process, and above the current severity used by Moody's to rate this transaction. This would be credit-negative for the transaction, and may lead to a downgrade.

Moody's based its analysis on preliminary information that the servicer provided about this future modification program. Moody's notes that the transaction agreements are not yet finalized to reflect these loan modification guidelines.

Based on information provided by the servicer, Moody's identified credit-positive aspects that include:

-- The servicer cannot modify current loans. In order to qualify for a loan modification, the borrower has to be delinquent (at least 12 installments past due in the case of the two products that offer more significant haircuts, while for the third product the servicer can offer a loan modification to a borrower with a lower delinquency but subject to detailed analysis). As of February 2013, 39% of the current pool was 360+ days past due. In addition, the servicer must perform sufficient and effective collecting actions before offering a modification product.

-- Although the loan modification may entail a principal haircut, this haircut cannot be higher than 30% of the outstanding balance of the loan. This limits the servicer's discretion when negotiating the haircuts. In general, principal and interest are forgiven if the borrower continues to be current on the loan during a certain period of time.

-- Recoveries on the modified loan must be higher than recoveries through the judicial foreclosure process. The servicer must perform a net present value analysis to satisfy this condition on a case by case basis in order to maximize collections from collateral.

-- Modifications must be negotiated on an individual basis, rather than as part of a general program. This is positive because it means that the servicer should understand the borrower's financial situation and evaluate causes of default and the borrower's willingness to pay, which in turn would determine the modification product to be offered.

-- When granting a modification, the servicer must first obtain from the borrower a pre-consent to either a died-in-lieu of foreclosure, or an expedited foreclosure process, both expected to reduce the time of repossession of the collateral if the borrower re-defaults under the modified terms.

-- The servicer cannot provide more than one modification to a borrower.

-- Modified loans will only be considered "current" for purposes of overcollateralization (OC) calculation if they have been current for at least 3 consecutive months after being modified, and should be current for the same number of months to be considered as "current" for purposes of servicer fee calculation.

However, from an industry perspective, loan modification programs generally also entail risks:

-- The servicing fee structure may not fully align the interests of investors with those of the servicer in some cases. By charging a higher fee for current loans, the servicer may be tempted to provide modifications to borrowers who do not deserve them, or to extend another modification to an already modified loan.

-- The servicer may offer a loan modification without pursuing adequate collection actions against the borrower, or may offer loan modifications to a large number of obligors, increasing the risk of moral hazard.

-- If the loan modifications are not documented properly, the servicer may not be able to repossess the collateral as fast as expected.

-- General discretion of the servicer to implement the loan modification program within the guidelines. For example, the servicer will have discretion in determining the key assumptions to calculate the net present value of the loss of a modified loan, when compared to the severity of the loss of a foreclosure process.

-- Lack of transparent and complete reporting of loan modifications, which may make it difficult to assess the full impact of the loan modification program on the credit quality of the pool.

Before any implementation of the loan modification program, Moody's assumed a loan severity of 50% of the pool's outstanding balance. Moody's notes that it is reviewing this assumption as part of the actions taken over the ratings of this transaction announced on February 22, 2013.

Moody's analyzed what would be the potential severity of the loss if the servicer implements the proposed modification program. In performing this calculation, Moody's considered a principal forgiveness of 30% of the loan's outstanding balance (the maximum that can be provided to a borrower), a re-default rate of 55% (which indicates the proportion of loans that re-default after being modified), and loss given default of 50%. Under those assumptions, the severity of the loss after implementing the modification products would be 49%, which is very similar to the severity of the loss Moody's currently assumes for the pool (50%). As a result, the risks of a negative impact on the transaction as of today seem mitigated. However, if Moody's assumes a loan re-default rate of 58%, the severity associated with the loan modification programs would be slightly higher than the current assumption, which would be credit negative.

Moody's notes that the assumptions regarding modifications are subject to high volatility due to the limited reliable data available on loan severities and re-defaults. There is a limited number of cases that have gone through the judicial foreclosure process, with the corresponding sale of the guarantee. In addition, there is very limited historical data on actual performance of modified loans and modified loans' re-default rates. As a result, these assumptions could change as more data points become available.

Moody's does not express an opinion as to whether the proposed modification products could have other, non credit-related effects. Moody's opinion was based in part on the servicer's description of how it expects to implement these loan modification products. Further, Moody's opinion does not preclude the possible future downgrade or withdrawal of the current ratings for any reason, including Moody's opinion with respect to the implementation and effectiveness of these loan modification products and any adverse effect they may have on the credit quality and performance of the affected transaction.

The modification products to be implemented over the collateral, consist mainly of: i) the deferral of a percentage of past due installments, with the possibility of forgiving a portion of this amount, ii) a discount applied to the outstanding balance of a delinquent loan, reducing the monthly payment permanently, and iii) a discount on the outstanding balance, if the loan is liquidated in full. According to the product implementation guidelines, the maximum discount to be granted over a loan's balance can be of up to 30% of the outstanding principal amount of the loan. In the first two loan modification products described, principal will only be forgiven if the borrower continues to be current after the loan is modified.

Gustavo Salaiz
Associate Analyst
Structured Finance Group
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Maria Muller
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Moody's: Loan modification program to be executed by ABC Capital in Mexican RMBS CREYCB 06U and 06 -- 2U could be credit positive or negative, depending on implementation
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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