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26 Feb 2009
New York, February 26, 2009 -- Moody's Investors Service announced today that it is raising its loss
expectations for US subprime residential mortgage-backed securities
(RMBS) issued between 2005 and 2007. As a result, it has
placed 7,942 tranches of subprime RMBS with an original balance
of $680 billion, on review for possible downgrade.
The revised loss projection for 2006 vintage subprime pools is expected
to fall within the range of 28% to 32% of the original balance
of such pools, whereas Moody's previous estimate was 22%.
For 2005 and 2007 pools, such projections are expected to range
from 12% to 14% and 33% to 37% of original
balance, respectively.
Moody's attributes the higher loss expectations to the continued
deterioration in home prices, rising loss severities on liquidated
loans, persistent elevated default rates, and progressively
diminishing prepayment rates throughout the sector. The updated
projections will reflect current home price projections from Moody's
Economy.com. The Homeowner Affordability and Stability Plan
(the "Homeowner Plan"), first announced February 18th
with specific guidelines expected to be released on March 4th, is
expected to have a mitigating impact on Moody's loss estimates.
Moody's has formed a preliminary estimate of the impact of the Homeowner
Plan and included that estimate in the numbers discussed in this press
release, recognizing that our estimate could change when additional
detail becomes available next week.
Moody's loss projections will be calculated in three stages.
First, we project delinquency rates and eventual losses during the
period through late 2009, when we anticipate that home prices will
reach bottom in many parts of the US. This is done assuming no
government intervention or concerted industry-wide modification
effort. Second, still assuming no intervention, losses
are projected for the remaining life of a deal. In this no-intervention
case, Moody's expectation for the 2006 vintage is that projected
losses would reach 33% of the original balance. Under such
conditions, Moody's would expect existing subprime loans to
default at a rate of 72%, with loss severities on liquidated
properties of 70% on average. Parallel projections for 2005
and 2007 would be losses of 14% and 40% of original securitized
balances, respectively. The third stage of the deal-specific
analysis quantifies the anticipated impact of loan modifications and other
aspects of government support under the Homeowner Plan.
Currently, 42% of outstanding 2006-vintage subprime
loans are at least 60 days delinquent, in foreclosure, or
held for sale (REO). Moody's believes that, without
intervention, nearly all of the already-delinquent loans
will eventually default. This assessment is based on very high
current observed roll rates to foreclosure combined with increasing unemployment
and decreasing property values. In addition, Moody's
believes that, by year end, one-third of borrowers
who are currently paying on their mortgages will become delinquent and
eventually default (representing 19% of today's outstanding
loans). This projection is based on loan-level analysis
of the mortgages, including forecasted loan-to-value
ratios (LTVs) for the end of 2009. The LTV ratios were determined
by using projections from Moody's Economy.com for metropolitan
statistical areas (MSAs). In addition, other predictive metrics
such as loan type, occupancy status and documentation level were
considered in the analysis.
Despite anticipating modest recovery in the housing environment in the
next few years, Moody's expects subprime borrowers will find
limited refinancing opportunities due to negative equity and lack of available
credit. Moody's projects that an additional 22% of
today's non-delinquent loans would default after 2009 (representing
13% of outstanding loans). This, when added to the
defaults anticipated from both existing delinquencies and delinquencies
expected by year-end, would lead to the overall default rate
of 72% discussed above.
Loss severities have also worsened in the last few months, rising
to 63%. Moody's is anticipating loss severities to
rise to around 70%, based on an expected further 10-15%
decline in home values. Even as the housing market boomed in recent
years, subprime loss severities increased with loan age.
This is generally attributable to accrual of servicer advances and declines
in property condition associated with lengthened foreclosure timelines.
The likelihood of similar issues persisting in the future leads Moody's
to conclude that, despite the anticipated recovery in the housing
market, subprime severities are likely to remain elevated over time.
As noted above, Moody's will likely temper its loss expectations
discussed in the preceding paragraphs in light of the Homeowner Plan.
We anticipate that final subprime loss projections will be reduced from
the 33% no-intervention case outlined above to the area
of 28% to 32% for the 2006 vintage, depending on additional
details of the government's plans.
The announced reviews impact all ratings within the subprime RMBS sector
currently rated Ca and above. The ratings of senior bonds that
are highly likely to be paid in full in the near term are expected to
be confirmed when rating actions are taken. The same may also be
true for bonds with structural mitigants relative to the revised loss
expectation.
The anticipated actions will vary by vintage, but based on our anticipated
average loss projections, it is likely that the vast majority of
mezzanine and subordinate certificates currently rated B or above would
be downgraded to ratings of Caa or below, particularly for bonds
issued in 2006 and 2007. As noted above, actions on senior
bonds will differ based on payment priority and protection relative to
projected losses. Given the level of losses currently being projected,
a majority of senior certificates will likely be downgraded below investment
grade. Many are expected to be downgraded to Caa or below,
particularly longer duration bonds from 2006 and 2007.
More detailed information about our revised loss assumptions and their
application to the review of Moody's-rated subprime RMBS
will be published in a report and made available on Moodys.com
within several days of publication of the guidelines associated with the
Homeowner Plan.
A list of the review actions associated with this announcement may be
found at:
Excel: http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBS_SF157819
New York
John Park
Managing Director
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Amelia (Amy) Tobey
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's places 2005-2007 subprime RMBS on review for downgrade
No Related Data.
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