Approximately $4.9 billion of US asset-backed securities affected
NOTE: On June 25, 2012, the Press Release was revised as follows: Changed the first paragraph from:
Moody's Investors Service has downgraded the ratings on 237 tranches in 24 securitizations of small business loans issued by Bayview Commercial Asset Trusts and Bayview Commercial Mortgage Pass-Through Trusts.
to
Moody's Investors Service has downgraded the ratings on 237 tranches in 24 securitizations and confirmed the ratings of three tranches in two securitizations of small business loans issued by Bayview Commercial Asset Trusts and Bayview Commercial Mortgage Pass-Through Trusts.
Changed the fourth paragraph in the Regulatory Disclosures section from:
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 this transaction in the past six months.
to
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 this transaction, and the assessments had a neutral impact on the rating.
Revised release follows:
New York, May 31, 2012 -- Moody's Investors Service has downgraded the ratings on 237 tranches in 24 securitizations and confirmed the ratings of three tranches in two securitizations of small business loans issued by Bayview Commercial Asset Trusts and Bayview Commercial Mortgage Pass-Through Trusts.
RATING RATIONALE
Three factors prompted the downgrades: 1) persistently high delinquency
levels, high volumes of modified loans with higher delinquency rates
than non-modified loans, and increased loss severities,
which together have prompted Moody's upward revision to its loss
expectations; 2) a decrease in credit enhancement resulting from
losses on loans; and 3) ongoing interest shortfalls in ten of the
securitizations.
These downgrades also reflect the correction of an error in previous rating
actions taken on the Bayview Commercial Asset Trust 2006-4,
2007-1, 2007-2, 2007-3, and 2007-4
securitizations. For these securitizations, the subordination
calculation of the Class A-1 tranche did not include subordination
credit from the Class A-2 tranche, thereby understating credit
enhancement. Today's actions correct this error by including
the Class A-2 tranche in the calculation of subordination for Class
A-1.
Moody's raised its loss projections for these pools to reflect the
persistently poor performance. Delinquency levels have been high
and increasing despite loan liquidations, indicating that new delinquencies
are still occurring, which will lead to further losses. As
of a year ago, delinquencies of 60 days or more, including
loans in foreclosure and REO, were generally declining for Bayview
small business ABS deals; however, since then, delinquencies
reversed their decline and began to increase, now typically constituting
between 15% and 25% of outstanding pool balances.
Severities have also been high, reaching about 90% during
2011 and remaining at this level through to today, versus about
80% seen in 2010, and less than 70% in previous years.
Despite a modest rebound, commercial property values in non-major
markets are far from peak levels and are still contributing to 1) high
delinquency rates as a result of borrowers' continued negative equity
position and 2) high severity rates.
A key factor in Moody's updated loss projections is its evaluation
and treatment of modified loans. Bayview Loan Servicing has modified
approximately 35% to 50% of the loans it now classifies
as current in its 2005 to 2008 small business loan pools (in 2003 and
2004 pools, approximately 20% to 30% of current loans
have been modified). Most of these loans had performance problems
and were delinquent before modification and are therefore more likely
to become delinquent in the future than non-modified loans.
Moody's evaluation of loan-level data shows that these current,
modified loans are at least twice as likely to become delinquent and default
compared to current, non-modified loans. Moody's
accounted for this likelihood in its loss projection methodology described
below.
High losses over the past year have eroded the credit enhancement available
to protect bondholders from future collateral losses, with declines
in credit enhancement to senior notes from subordination, reserve
accounts, and overcollateralization from an average of about 34%
a year ago to 29% today.
Ten of the deals subject to today's actions have had or continue
to have interest shortfalls. Interest shortfalls occur when the
interest from the collateral pool is insufficient to cover the interest
due on the notes. In these deals, high volumes of interest
rate reduction loan modifications and delinquent loans for which the servicer
does not always advance interest cause a reduction in interest income
available to pay interest on the bonds. In addition, swap
payments and payments to IO tranches rank senior to Class A noteholders
for interest distribution. In Bayview Commercial Asset Trusts 2005-3,
2006-4, 2007-2, 2008-1 and 2008-4,
interest shortfalls have either recently corrected themselves or are likely
to do so within a year, and ratings were generally reduced to at
least A1 to reflect expectations for short-term interest shortfalls.
In Bayview Commercial Asset Trusts 2007-4, 2007-5,
2007-6, 2008-2 and 2008-3, the interest
shortfalls will persist for a longer period, in which case Moody's
has not maintained investment-grade ratings.
METHODOLOGY
For today's actions, Moody's evaluated the sufficiency
of credit enhancement by first analyzing the loans to determine an expected
lifetime net loss for each collateral pool. Moody's compared these
net losses with the available credit enhancement, consisting of
subordination and excess spread, as well as a reserve account or
overcollateralization. Moody's evaluated the sufficiency of loss
coverage provided by credit enhancement in light of 1) the magnitude and
projected variability of losses on the collateral and 2) servicer quality.
In forecasting expected losses, Moody's has evaluated the
roll rate behavior of loans in the Bayview small business ABS pools and
has generally assumed the same behavior will continue for about 18 months,
the amount of time Moody's projects a continued stressful environment
for these loans. After this stress period, Moody's
has assumed that roll rates and severities will improve to levels more
consistent with historical norms. This approach generally assumes
that the modification strategy pursued by Bayview Loan Servicing will
continue to be viable and will continue to prevent losses on some loans
that would otherwise default. On the other hand, to reflect
the uncertainty of ultimate success of the modifications, in determining
the Aaa level for each deal, which is the level of credit enhancement
that would be consistent with a Aaa (sf) rating for the given asset pool,
Moody's assumed a higher degree of volatility for these pools than
would be assumed for pools with no modified loans.
To forecast expected losses for the Bayview small business ABS collateral
pools, Moody's evaluated each pool according to the delinquency
and modification status of the underlying loans, applying different
roll rates to default to loans according to each status. In order
to determine the roll rates to default, Moody's first assessed
the past 12 months of monthly roll rate behavior for loans according to
their modification and delinquency status. Then, to translate
this recent historical data into lifetime default rates, Moody's
applied the recent roll rates to each delinquency and modification category
for the 18-month stress period. Moody's then decreased
the monthly roll rates to more stable historical norms for the remainder
of the period over which Moody's calculates the loss, typically
until the pool of loans pays down to 5% to 10% of its original
balance.
This approach leads to a wide range of lifetime default rates.
For modified current loans, the lifetime default rate was 20%,
double the lifetime default rate estimate of 10% for non-modified
current loans. For delinquent loans, the lifetime default
rates range from 30% to 75% depending on delinquency and
modification status. For loans in foreclosure or REO, the
lifetime default rates are roughly 55% to 80% and 95%
to 100%, respectively, depending on vintage and modification
status.
For loss severities, Moody's generally applied recent severities
for the 18-month stress period of the loss calculation.
Recent severities have been over 90% for non-modified loans
and about 75% for modified loans. For the period after 18
months, Moody's applied severities ranging from 65%
to 75%. The resulting, remaining expected losses are
generally in the range of 15% to 24%, as a percentage
of outstanding pool balances.
Because the ultimate re-default risk of small business loan modifications
and the success of Bayview's modification program is unknown,
Moody's considers the potential volatility of expected losses for
these pools to be higher than pools with no modifications. As a
result, the Aaa level for most of the Bayview small business ABS
deals impacted by today's rating actions was 48% to 58%,
a multiple of 2.4 to 3.2 times the expected remaining loss.
Although Moody's expected losses for these Bayview deals are generally
not higher than they would be for comparable deals without modifications,
the Aaa multiples are higher than for comparable deals without modifications.
Moody's assigned the ratings for the tranches of the Bayview Commercial
Asset Trusts and Bayview Commercial Mortgage Pass-Through Trusts
in accordance with the methodology in the preceding paragraphs.
Moody's rated the interest-only bonds in accordance with
"Moody's Approach to Rating Structured Finance Interest-Only
Securities."
The master servicer is Wells Fargo Bank. Commercial real estate
primarily secures the loans. The largest property types in these
deals are multifamily, retail, mixed use, and office.
The primary factors for assumption uncertainty are the general economic
environment, commercial property values, and the ability of
small businesses to recover from the recession. If the remaining
expected losses increase by 10%, then the senior tranches
may be downgraded.
Other methodologies and factors that Moody's may have considered in the
process of rating these transactions appear on Moody's website.
More information on Moody's analysis of this transaction is available
at www.moodys.com.
A list of these actions including CUSIP identifiers may be found at:
http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF286301
A list of updated estimated pool losses and Aaa levels may be found at:
http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF286592
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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, parties not involved in the ratings,
public informationconfidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics 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 this transaction, and the assessments had a neutral 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.
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.
Katherine Lew
Associate 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
Amelia (Amy) Tobey
VP - Senior Credit Officer
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 ratings on Bayview's small business ABS
