$5 billion in bonds affected; remain on review for further downgrade
New York, November 21, 2011 -- Moody's Investors Service has downgraded 16 Home Equity Conversion Mortgages
reverse mortgage-backed securities in 12 deals. All of the
downgraded securities remain on review for further downgrade.
The collateral backing these transactions consists primarily of HECM reverse
mortgages that benefit from mortgage insurance protection from the Federal
Housing Administration, a federal agency in the Department of Housing
and Urban Development (HUD). Two of the transactions, Riverview
2007-4 and Riverview 2008-1, are resecuritizatons
backed by HECM bonds.
Moody's has downgraded to Aa1 (sf) from Aaa (sf) its ratings on
class As from MECA deals, and class A-1 from Riverview 2007-3
, and to Aa2 (sf) from Aaa (sf) the ratings on the classes A,
A-2, and A from Riverview 2007-1, Riverview
2007-2, REV 2007-2 respectively, one notch lower
than the other bonds, as these three deals are currently under-collateralized.
The rating actions on the resecuritization classes A1 through A5 from
Riverview 2008-1 and class A from Riverview 2007-4 correspond
to that of the underlying HECM bonds.
RATINGS RATIONALE
Falling home prices and longer liquidation timelines expose these transactions
to potential losses. Even though these mortgages are insured by
HUD, they could be exposed to losses if the properties backing them
are not liquidated within six months of entering REO.
For Home Equity Conversion Mortgages, servicers have to follow strict
HUD liquidation guidelines, once a borrower dies or vacates the
property permanently and HUD verifies that the loan is due and payable.
Typically, the servicer must first give the borrower's estate
six months to pay the loan in full before initiating foreclosure.
If the property does not sell during the foreclosure sale, the loan
enters REO, at which point the servicer starts marketing the property.
If the property remains unsold after six months in REO, the servicer
has to provide HUD an appraisal of the property conducted by a HUD-approved
appraiser. HUD will base its reimbursement for the liquidated property
on the appraisal amount (the appraisal-based claim).
HUD will cover the difference between the unpaid loan balance at liquidation
and the latest appraisal amount if the appraisal amount is lower than
the unpaid loan balance. HUD will not cover any shortfalls if the
property sells for less than this appraised amount. In that case,
the trust will cover the shortfall between the latest appraisal value
and the actual REO proceeds.
With falling home prices and longer liquidation timelines, the risk
that loans will take longer than six months to sell after entering REO
has risen significantly, a trend corroborated by data from servicers.
Currently, approximately 7%-10% of the matured
servicer portfolios, where HUD has verified that loans are due and
payable, consist of loans that have been in REO for longer than
six months. Losses on loans that have sold after six months of
entering REO have averaged 20%, that is, on average,
properties are selling for 20% less than their appraised amounts.
METHODOLOGY:
In order to arrive at the losses, Moody's assumed that servicers
will file appraisal based claims on 80% of the loans currently
in REO and that these properties will sell at 20% lower than the
appraisal values. Moody's also assumed that all properties
that are currently in foreclosure will enter REO. Moody's
combined loss estimates from loans currently in REO and foreclosure and
then doubled this loss to account for the replenishment of such loans
in the future. Moody's also assumed foreclosure cost of $1,000
for each loan backing the HECM deals as the average foreclosure cost per
loan is around $2000 - $4,000 and as HUD reimburses
only two thirds of the foreclosure cost.
The methodology that was used in assigning initial ratings to the HECM
deals assumed minimal losses from appraisal based claims because very
few loans were sold after six months in REO and those loans were usually
sold for more than their appraisal amounts.
The transactions impacted by this rating action have relatively thin credit
enhancement, typically 1%-3% of outstanding
pool balance, although credit enhancement continues to build up
due to excess spread. Because any losses accrued on the liquidated
properties are not allocated until final maturity, there is a significant
amount of time to build support through excess spread. However,
the coverage for these losses is still very limited and not consistent
with the Aaa(sf) ratings.
The primary reason for the uncertainty about actual sales prices and possible
shortfall is the weak macro-economic environment. Properties
are taking longer to sell, and sales prices are often lower than
the latest appraisal values.
During the review, Moody's will further refine its assumptions for
the frequency of appraisal-based claims and the losses arising
from them. The ratings on the HECM deals may be downgraded further
by multiple notches if the REO properties backing these deals continue
to grow and if these properties are consistently sold below their appraisal
prices.
Other methodologies and factors that Moody's may have considered
in the process of rating this issuer can also be found on Moody's website,
www.moodys.com.
Complete rating actions are as follows:
Issuer: Mortgage Equity Conversion Asset Trust 2006-SFG1
Cl. A, Downgraded to Aa1 (sf) and Placed Under Review for
Possible Downgrade; previously on Aug 2, 2011 Confirmed at
Aaa (sf)
Issuer: Mortgage Equity Conversion Asset Trust 2006-SFG2
Cl. A, Downgraded to Aa1 (sf) and Placed Under Review for
Possible Downgrade; previously on Aug 2, 2011 Confirmed at
Aaa (sf)
Issuer: Mortgage Equity Conversion Asset Trust 2006-SFG3
Cl. A, Downgraded to Aa1 (sf) and Placed Under Review for
Possible Downgrade; previously on Aug 2, 2011 Confirmed at
Aaa (sf)
Issuer: Mortgage Equity Conversion Asset Trust 2007-FF1
Cl. A, Downgraded to Aa1 (sf) and Placed Under Review for
Possible Downgrade; previously on Aug 2, 2011 Confirmed at
Aaa (sf)
Issuer: Mortgage Equity Conversion Asset Trust 2007-FF2
Cl. A, Downgraded to Aa1 (sf) and Placed Under Review for
Possible Downgrade; previously on Aug 2, 2011 Confirmed at
Aaa (sf)
Issuer: Mortgage Equity Conversion Asset Trust 2007-FF3
Cl. A, Downgraded to Aa1 (sf) and Placed Under Review for
Possible Downgrade; previously on Aug 2, 2011 Confirmed at
Aaa (sf)
Issuer: Reverse Mortgage Loan Trust, Series REV 2007-2
Cl. A, Downgraded to Aa2 (sf) and Placed Under Review for
Possible Downgrade; previously on Aug 2, 2011 Confirmed at
Aaa (sf)
Issuer: Riverview HECM Trust, Series 2007-1
CL. A, Downgraded to Aa2 (sf) and Placed Under Review for
Possible Downgrade; previously on Aug 2, 2011 Confirmed at
Aaa (sf)
Issuer: Riverview Mortgage Loan Trust 2007-2
Cl. A-2, Downgraded to Aa2 (sf) and Placed Under Review
for Possible Downgrade; previously on Aug 2, 2011 Confirmed
at Aaa (sf)
Issuer: Riverview Mortgage Loan Trust 2007-3
CL. A-1, Downgraded to Aa1 (sf) and Placed Under Review
for Possible Downgrade; previously on Aug 2, 2011 Confirmed
at Aaa (sf)
Issuer: Riverview HECM Trust, Series 2008-1
Cl. A-1, Downgraded to Aa1 (sf) and Placed Under Review
for Possible Downgrade; previously on Aug 2, 2011 Confirmed
at Aaa (sf)
Cl. A-2, Downgraded to Aa1 (sf) and Placed Under Review
for Possible Downgrade; previously on Aug 2, 2011 Confirmed
at Aaa (sf)
Cl. A-3, Downgraded to Aa1 (sf) and Placed Under Review
for Possible Downgrade; previously on Aug 2, 2011 Confirmed
at Aaa (sf)
Cl. A-4, Downgraded to Aa1 (sf) and Placed Under Review
for Possible Downgrade; previously on Aug 2, 2011 Confirmed
at Aaa (sf)
Cl. A-5, Downgraded to Aa1 (sf) and Placed Under Review
for Possible Downgrade; previously on Aug 2, 2011 Confirmed
at Aaa (sf)
Issuer: Riverview HECM Trust 2007-4
CL. A, Downgraded to Aa2 (sf) and Placed Under Review for
Possible Downgrade; previously on Aug 2, 2011 Confirmed at
Aaa (sf)
A list of these actions including CUSIP identifiers may be found at:
Excel: http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF268313
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are considered EU Qualified
by Extension and therefore available for regulatory use in the EU.
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:
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's did not receive or take into account a third-party
assessment on the due diligence performed regarding the underlying assets
or financial instruments related to the monitoring of these transactions
in the past six months.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
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Jayesh Joseph
Analyst
Structured Finance Group
Moody's Investors Service, Inc.
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Debashish Chatterjee
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Moody's downgrades $5 billion of HECM reverse mortgage bonds