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12 Apr 2010
New York, April 12, 2010 -- Moody's Investors Service has placed 270 option ARM residential mortgage-backed
securities (RMBS) with an outstanding balance $4.7 billion
on review for possible downgrade. The review action was prompted
by continued performance deterioration in these vintages.
Although pools backing pre-2005 (seasoned) option ARM RMBS have
paid off substantially -- pool factors average less than 15%
-- the remaining loans in these pools have been under pressure as
a result of the sharp decline in home values. Option ARM annual
delinquency rates, measured as total new delinquencies during a
year as a percentage of the contractually current pool balance at the
start of the year, have increased, averaging about 15%
over the past 12 months for option ARM pools originated from 2002 to 2004,
versus about 10% for those same pools over the prior 12-month
period.
Over the coming months, we expect continued negative performance
from seasoned option ARM pools, as the overhang of impending foreclosures
will impact home prices negatively. The most important predictor
of mortgage default in the past several years has been the degree to which
borrowers have negative equity in their homes. Moody's Economy.com
(MEDC) expects home prices to fall by about an additional 5-7%,
reaching bottom in the coming year, which means that home values
will ultimately drop about 17-20% from mid-2004 levels
and about 5-10% from mid-2003 Levels. Option
ARM borrowers, who typically had loan-to-value ratios
around 70-75% at closing, are therefore increasingly
subject to protracted periods of little to no equity in their homes.
Adding to borrowers' ongoing financial pressure, unemployment is
still projected to peak at 10.2% in the second half of 2010.
Recovery in both home values and unemployment is expected to be slow.
Review Action
To determine which tranches to place on review, Moody's compared
the tranches' credit enhancement from subordination to a loss proxy
that was based on a multiple of two times the lifetime pipeline losses
expected from the related pools. The lifetime pipeline loss was
derived based on lifetime roll rates to default of 85% for 60-day
delinquencies, 95% for 90+day delinquencies, 100%
for loans in foreclosure, and 100% for real estate owned,
each applied with a severity assumption of 60%. Tranches
without enough credit enhancement to sustain current ratings based on
this calculation have been placed on review for possible downgrade.
Tranches expected to pay off in full in the coming months were not placed
on review
Although the dollar volume of senior tranches remaining from pre-05
option ARM RMBS is only about 13% of the original dollar volume
issued, most seasoned option ARM deals still have some senior tranches
outstanding. Senior tranches were placed on review according to
the subordination offered by subordinate/mezzanine tranches. Certain
tranches that may benefit from super-seniority or first-pay
status in the waterfall may be confirmed as additional transaction-specific
analysis is concluded over the coming months.
Revision of Loss Methodology for Seasoned RMBS
In the coming months, Moody's will update its loss projection methodology
for seasoned RMBS, and will release a report detailing the updated
methodology.
Other methodologies and factors that may have been considered in the process
of rating this issue can also be found at www.moodys.com
in the Rating Methodologies subdirectory. Moody's also publishes
a weekly summary of structured finance credit, ratings and methodologies,
available to all registered users of our website, at www.moodys.com/SFQuickCheck.
A list of the review actions associated with this announcement may be
found at:
Exel: http://v3.moodys.com/page/viewresearchdoc.aspx?docid=PBS_SF200329
For more information see www.moodys.com.
New York
Amita Shrivastava
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Karandeep Bains
Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's places pre-2005 option ARM RMBS on review for possible downgrade
No Related Data.
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