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Rating Action:

Moody's downgrades $5 billion of HECM reverse mortgage bonds

07 Mar 2012

New York, March 07, 2012 -- Moody's Investors Service has downgraded 13 securities from 10 deals backed by Home Equity Conversion Mortgages (HECM). Moody's also downgraded six reverse mortgage backed resecuritization bonds from two deals.

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).

Complete rating actions are as follows:

Issuer: Mortgage Equity Conversion Asset Trust 2006-SFG1

Cl. A, Downgraded to Ba3 (sf); previously on Nov 21, 2011 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Issuer: Mortgage Equity Conversion Asset Trust 2006-SFG2

Cl. A, Downgraded to Ba3 (sf); previously on Nov 21, 2011 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Issuer: Mortgage Equity Conversion Asset Trust 2006-SFG3

Cl. A, Downgraded to Ba3 (sf); previously on Nov 21, 2011 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Issuer: Mortgage Equity Conversion Asset Trust 2007-FF1

Cl. A, Downgraded to Ba3 (sf); previously on Nov 21, 2011 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Issuer: Mortgage Equity Conversion Asset Trust 2007-FF2

Cl. A, Downgraded to Ba3 (sf); previously on Nov 21, 2011 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Issuer: Mortgage Equity Conversion Asset Trust 2007-FF3

Cl. A, Downgraded to B1 (sf); previously on Nov 21, 2011 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Cl. IO, Downgraded to B1 (sf); previously on Feb 22, 2012 Downgraded to Aa1 (sf)

Issuer: Reverse Mortgage Loan Trust, Series REV 2007-2

Cl. A, Downgraded to Ba2 (sf); previously on Nov 21, 2011 Downgraded to Aa2 (sf) and Placed Under Review for Possible Downgrade

Issuer: Riverview HECM Trust, Series 2007-1

CL. A, Downgraded to Ba3 (sf); previously on Nov 21, 2011 Downgraded to Aa2 (sf) and Placed Under Review for Possible Downgrade

Issuer: Riverview Mortgage Loan Trust 2007-2

Cl. A-2, Downgraded to B1 (sf); previously on Nov 21, 2011 Downgraded to Aa2 (sf) and Placed Under Review for Possible Downgrade

Cl. X, Downgraded to Ba2 (sf); previously on Feb 22, 2012 Downgraded to Aa1 (sf)

Issuer: Riverview Mortgage Loan Trust 2007-3

CL. A-1, Downgraded to B1 (sf); previously on Nov 21, 2011 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Cl. X, Downgraded to B1 (sf); previously on Feb 22, 2012 Downgraded to Aa1 (sf)

Issuer: Riverview HECM Trust 2007-4

CL. A, Downgraded to Ba3 (sf); previously on Nov 21, 2011 Downgraded to Aa2 (sf) and Placed Under Review for Possible Downgrade

Issuer: Riverview HECM Trust, Series 2008-1

Cl. A-1, Downgraded to Ba3 (sf); previously on Nov 21, 2011 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Cl. A-2, Downgraded to Ba3 (sf); previously on Nov 21, 2011 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Cl. A-3, Downgraded to Ba3 (sf); previously on Nov 21, 2011 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Cl. A-4, Downgraded to Ba3 (sf); previously on Nov 21, 2011 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Cl. A-5, Downgraded to Ba3 (sf); previously on Nov 21, 2011 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

RATINGS RATIONALE

The rating actions are triggered by revised loss projections (reflecting falling home prices and longer liquidation timelines) and the relatively thin credit enhancement, typically 1%-3% of outstanding pool balance and 0.2%-0.7% of excess spread per year. 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.

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.

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 real estate owned (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. Losses on loans that have sold six months after entering REO have averaged 20%, that is, on average, properties are selling for 20% less than their appraised amounts. These trends are generally consistent with that of forward mortgages where REO properties are sold on average at about 15% lower than their updated appraisal values and where the majority of the REO properties are sold six months after the foreclosure sale.

METHODOLOGY:

Repayment of a reverse mortgage is triggered primarily when the loan matures either due to a mortality event when the last borrower dies or by a mobility event when the borrower(s) permanently move out of the property. Repayment is also triggered when the servicers assign the loan to HUD upon loan balance reaching 98% of the Maximum Claim Amount (MCA). Loan balances increase each month by accrued interest, borrower draws on their respective available lines of credit, servicer fees and other expenses.

The credit risks for HECM reverse mortgages are property values, interest rates, maturity rates, i.e., the rate at which the maturity events will occur, and draw rates. In addition, expected losses are sensitive to the probability for a matured loan to have an appraisal based claim, the shortfall between the latest appraisal value and the actual REO proceeds (appraisal haircut) for such claim, and the time period for which the shortfall will be experienced.

Moody's assumed that HUD would pay the loan in full that servicers assign to them upon loan balance reaching 98% of the MCA and that the borrower estate would pay the loan in full if the loan has positive equity upon maturity, both scenarios resulting in no loss to the trust. For the rest of the matured loans with no equity, Moody's assigned an 85% probability that an appraisal based claim will be filed resulting in a loss of 20% of the latest appraisal value to the trust. Moody's further assumed that there will be no loss from the appraisal based claims after the next 2, 3, and 5 years for B, Ba, and Baa rating levels respectively.

Moody's assumptions on property values, interest rates, maturity rates, and draw rates are as described below:

• Moody's assumed that house prices will decline by approximately 1.5% from the 4Q 2011 levels until end of 4Q 2012 after which house prices will increase at annual rate of 5% until the end of 2016, and then increase at an annual rate of 3.5% in the base case (B2 rating level) based on Moody's Macroeconomic Board projection. For higher rating levels these assumptions were stressed. In the Aaa scenario, Moody's assumed home prices to further decline by 30% from the 4Q 2011 levels until 4Q 2012 with no increase thereafter to be able to withstand a similar peak to trough house price decline experienced since 2007. The Baa scenario is calibrated in between Aaa and B2 rating levels where Moody's assumed home prices to further decline by 15% from 4Q 2011 levels until 4Q 2012 and then increase at an annual rate of 2.5%.

• For interest rates, the assumption is for the 1 year CMT rate to remain flat at 0.1% for the next 3 years until the end of 2014, increase to 1% by 2Q 2016, and then increase to 4% by 4Q 2017 and stabilize thereafter. The interest rate is kept low for the next three years to account for the Fed's policy of keeping interest rates low through 2014 and the long term rate is set to 4% based on Moody's Analytics' forecast. In the Aaa rating level, Moody's assumed that the CMT rate would increase from the current rate of 0.1% to 7%, the highest rate that CMT has risen to in the last 20 years, by 4Q 2013 and stabilize thereafter. The Baa scenario is calibrated in between Aaa and B2 rating levels where Moody's assumed CMT rates to remain flat at 0.1% until the end of 2014, increase to 1% by 1Q 2015, and then at a faster pace until it reaches 4.75% by the end of 2Q 2017 with a long term average of 4.25%.

• Moody's mortality rate assumptions, i.e. the rate at which mortality events occur, are based on "Annuity 2000 Mortality Tables" available in the Transactions of Society of Actuaries 1995-96 Reports . These tables provide mortality rates by age separately for males and females. Moody's mobility rate assumptions, i.e. the rate at which mobility events occur, are based on US Census Bureau, 2007 results . A monthly maturity rate is calculated to derive the portion of the loan that will be paid down each month based on the mobility and mortality rates for each borrower. These assumptions do not change by rating levels as they have very low correlation with different economic scenarios.

• Moody's annual draw rate assumption, i.e. the rate at which the borrowers will draw on their available line of credit is approximately 10%, which is based on the actual amount drawn over available line of credit since the closing of the deals and is kept constant for different rating levels.

In order to derive the ratings, Moody's first defined economic scenarios for the six rating levels (B2, Ba2, Baa2, A2, Aa2 and Aaa) as noted above and then projected cashflows for each rating level for the life of the deal. Monthly loan balances were calculated based on the projected accrued interest, amounts drawn, and fees. Moody's then applied the monthly maturity rate to determine the portion of the loan that will be paid down each month. The net monthly cash flow proceeds from each loan available to pay down the bonds was then calculated as the outstanding loan balance if the loan has equity, if the loan balance exceeds 98% of MCA, or if the loan matures after the next 2, 3, and 5 years for B, Ba, and Baa rating levels respectively. In other scenarios, the net monthly cash flow proceeds from each loan was calculated as the difference between outstanding loan balance and 20% of the latest appraisal value . These proceeds were then applied to the bonds per the deal structure, accounting for the funding account available to mitigate shortfalls in cash.

As a part of the sensitivity analysis, we stressed the credit risk drivers by an additional 10% and found that the implied ratings of the bonds do not change.

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.

A list of these actions including CUSIP identifiers may be found at: http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF277791

Other methodologies and factors that may have been considered in the process of rating this issue can be found at www.moodys.com in the Ratings Methodologies subdirectory within the Rating Methodologies and Performance directory.

REGULATORY DISCLOSURES

Although these credit ratings have been issued in a non-EU country which has not been recognized as endorsable at this date, the credit ratings are deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 30 April 2012. 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: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's received and took into account one or more third party assessments on the due diligence performed regarding the underlying assets or financial instruments in these transactions and the assessments had a negative impact on the rating.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings 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.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Jayesh Joseph
Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Bruce D. Fabrikant
Senior Vice President
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades $5 billion of HECM reverse mortgage bonds
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