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Rating Action:

Moody's assigns ratings to swap in ACE Securities Corp. Home Equity Loan Trust, Series 2006-FM1, an RMBS transaction

03 Nov 2010

New York, November 03, 2010 -- Moody's Investors Service has assigned a Ba3 (sf) rating on the Certificate Swap to the ACE Securities Corp. Home Equity Loan Trust, Series 2006-FM1 transaction. Moody's rating addresses the credit risk posed to the swap counterparty. This rating only addresses the risk attributable to the ability of the trust to continue to honor its obligations under the swap. The rating does not address market risk that may be experienced by the party facing the trust under the swap contract.

Issuer:

ACE Securities Corp. Home Equity Loan Trust, Series 2006-FM1 (Reference Number N503602N) Interest Rate Swap, Assigned Ba3 (sf)

RATINGS RATIONALE

The rating takes into account the rating of the swap counterparty, the transaction's legal structure and the characteristics of the collateral mortgage pool of the respective trust. Because there is relatively limited historical performance data for the types of instruments, this credit rating may have a greater potential rating volatility than would ratings for transactions supported by more historical performance data.

Our rating approach for this counterparty instrument rating (CIR) rests on three propositions:

» The CIRs are based on an analysis of the payment promise made by the trust, the position of the instrument in the payment waterfall, the credit quality of the rated payment flows, the security arrangements governing the trust's relationship with the counterparty, the support mechanisms available to the counterparty, the termination date of the swap and other structural features of the transaction in question. In this regard, the rating process is similar to that for all other ratings assigned by Moody's.

» The credit quality and ratings assigned to counterparty instrument obligations of the trust may differ from those of its payment obligations to bondholders. As a result, ratings assigned to bonds issued by the trust may diverge from the CIR and therefore the bond ratings may offer only a limited guidance on the CIR.

» Although counterparty instrument ratings address payments to rather than from the counterparty, in certain circumstances the credit strength of the counterparty itself may have a bearing on the CIR. For example, where a counterparty's non-performance under a swap agreement leads to the trust having to make a termination payment to that counterparty, Moody's will take into account the likelihood of the counterparty's non-performance occurring and the position of termination payments in the cash flow waterfall . Specifically, in the event that the swap counterparty causes a termination event, any termination payment owed to the swap counterparty may be paid at the bottom of the cash flow waterfall. As a result, a default by the swap counterparty, which is currently rated Aa3, makes payment in full to the counterparty unlikely.

By way of background, the swap counterparty, Deutsche Bank AG, New York Branch in this case, receives a fixed rate from, and pays LIBOR to, the trust on a notional amount that is the lesser of the aggregate class certificate balance and the amount set forth on the schedule to the swap agreement. Per the terms of the deal documents, the swap counterparty for the swap receives payments, prior to bondholders, and is thus in a senior position to all bonds issued by the trust. The termination date for the Certificate Swap is 13th May, 2013. To pay the swap counterparty, the trust also has access to principal payments, liquidation proceeds and interest collections. This provision strengthens the nature of senior payment right of the swap counterparty.

The primary risks driving the rating on the swap is the risk that the collateral pool amortizes at a rate that exceeds the amortization rate of the swap notional and the risk of a termination event triggered by a default of the swap counterparty. As the losses are not allocated to the senior certificates, it is likely, especially in high default scenarios, that the collateral balance would amortize faster than the swap notional. The counterparty in the swap, Deutsche Bank AG, New York Branch, has a Aa3 long term rating and a P-1 short term rating by Moody's.

Our methodology for rating swaps on US RMBS transactions includes running collateral cashflows and considers the rating of the swap counterparty. We stress the cashflows by increasing defaults and prepayments to determine what level of collateral stress would cause a shortfall in proceeds owed to the swap counterparty. The cashflows are modeled to reflect the waterfall of the underlying transaction, which results in all swap payments other than termination payments caused by a counterparty default coming at the top of the waterfall. Termination payments owed to the swap counterparty resulting from a default of the swap counterparty are paid at the bottom of the waterfall. The swap in this transaction passed scenarios consistent with the Ba3 collateral cashflow stresses Additional qualitative considerations that were not modeled, such as the impact of a decline in the weighted average interest rate of the collateral pool, interest rate reduction modifications or more conservative servicer advancing approaches, were also analyzed.

Moody's projected remaining loss on the mortgage pool as a percentage of the current balance is 63%.

Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

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 Investors Service did not receive or take into account a third party due diligence report on the underlying assets or financial instruments in this transaction.

REGULATORY DISCLOSURES

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, and confidential and proprietary Moody's Analytics' information.

Moody's Investors Service considers the quality of information available on the issuer of obligation satisfactory for the purposes of assigning a credit rating. However, the credit rating action was based on limited historical data.

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.

New York
Gaurav Singhania
Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Linda Stesney
MD - Structured Finance
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's assigns ratings to swap in ACE Securities Corp. Home Equity Loan Trust, Series 2006-FM1, an RMBS transaction
No Related Data.
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