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Rating Action:

Moody's takes action on $561 million of synthetic subprime transactions

09 Jul 2009

New York, July 09, 2009 -- Moody's Investors Service has placed on review the ratings of thirty seven tranches issued in four transactions from the Smart Home Reinsurance shelf.

The four Smart Home Reinsurance transactions include synthetic securitizations of mortgage insurance risk associated with a reference portfolio of approximately $4.89 billion of subprime and Alt-A mortgage loans. The mortgage insurance is provided by Radian Guaranty Inc. (Radian). Noteholders are exposed to the risk of future claims under the mortgage insurance policies. The riskiness of the notes is a function of the credit performance of the underlying reference portfolio of mortgage loans and the amount of risk assumed. Credit enhancement for the notes is provided primarily through subordination.

The actions are triggered by higher than anticipated delinquency levels and severity of loss as well as well as slower than anticipated voluntary prepayments for the reference portfolios, resulting in higher updated loss expectation for the underlying collateral and lower coverage for the rated debt given available credit enhancement.

The ratings on the securities are monitored by evaluating factors determined to be applicable to the credit profile of the securities, such as i) the nature, sufficiency, and quality of historical performance information regarding the asset class ii) an analysis of the underlying collateral, iii) an analysis of the transaction's allocation of cash flow and capital structure, and (iv) a comparison of these attributes against those of other similar transactions.

General loss estimation methodology for the reference portfolios is outlined below.

For recent vintages, Moody's calculates estimated losses for residential mortgage pools in a two-step process. First, serious delinquencies are projected through late 2009, primarily based upon recent performance. These projected delinquencies are converted into projected losses using lifetime roll rates (the probability of transition to default) averaging 85% for 60-day delinquencies, 90% for delinquencies greater than 90 days, 100% for loans in foreclosure and REO, and deal specific severity assumptions.

The second step is to determine losses beyond 2009. Depending on a deal's performance, as well as collateral credit characteristics, such as loan type, or loan-to-value ratios and geographic concentrations of remaining current loans, Moody's assumes varying degrees of slowing in the loss rate (which is measured by loss-to-liquidation) for the remaining life of the deal. Typical degrees of slowing in loss rate after late 2009 range from 15 to 25%.

Loss estimates are subject to variability and, as a result, realized losses could ultimately turn out higher or lower than our current expectations. Moody's will continue to evaluate performance data as it becomes available and will assess the pattern of potential future defaults and adjust loss expectations accordingly if necessary.

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 Credit Policy & Methodologies directory.

Complete rating actions are as follows:

Smart Home Reinsurance 2004-1 Limited

Cl. M-1, Aa2 Placed Under Review for Possible Downgrade; previously on 3/15/2005 Assigned Aa2

Smart Home Reinsurance 2005-1 Limited

Cl. M-1, Aa1 Placed Under Review for Possible Downgrade; previously on 3/15/2005 Assigned Aa1

Cl. M-2, Aa2 Placed Under Review for Possible Downgrade; previously on 3/15/2005 Assigned Aa2

Cl. M-3, Aa3 Placed Under Review for Possible Downgrade; previously on 3/15/2005 Assigned Aa3

Cl. M-4, A1 Placed Under Review for Possible Downgrade; previously on 3/15/2005 Assigned A1

Cl. M-5, A2 Placed Under Review for Possible Downgrade; previously on 3/15/2005 Assigned A2

Cl. M-6, A2 Placed Under Review for Possible Downgrade; previously on 3/15/2005 Assigned A2

Cl. M-7, A3 Placed Under Review for Possible Downgrade; previously on 3/15/2005 Assigned A3

Cl. M-8, Baa1 Placed Under Review for Possible Downgrade; previously on 3/15/2005 Assigned Baa1

Cl. M-9, Baa2 Placed Under Review for Possible Downgrade; previously on 3/15/2005 Assigned Baa2

Cl. M-10, Baa3 Placed Under Review for Possible Downgrade; previously on 3/15/2005 Assigned Baa3

Smart Home Reinsurance 2005-2 Limited

Cl. M-2, Aa2 Placed Under Review for Possible Downgrade; previously on 12/23/2005 Assigned Aa2

Cl. M-3, Aa3 Placed Under Review for Possible Downgrade; previously on 12/23/2005 Assigned Aa3

Cl. M-3A, Aa3 Placed Under Review for Possible Downgrade; previously on 3/14/2006 Assigned Aa3

Cl. M-4, A1 Placed Under Review for Possible Downgrade; previously on 12/23/2005 Assigned A1

Cl. M-4A, A1 Placed Under Review for Possible Downgrade; previously on 3/14/2006 Assigned A1

Cl. M-5, A1 Placed Under Review for Possible Downgrade; previously on 12/23/2005 Assigned A1

Cl. M-5A, A1 Placed Under Review for Possible Downgrade; previously on 3/14/2006 Assigned A1

Cl. M-6, A3 Placed Under Review for Possible Downgrade; previously on 12/23/2005 Assigned A3

Cl. M-6A, A3 Placed Under Review for Possible Downgrade; previously on 3/14/2006 Assigned A3

Cl. M-7, Baa1 Placed Under Review for Possible Downgrade; previously on 12/23/2005 Assigned Baa1

Cl. M-7A, Baa1 Placed Under Review for Possible Downgrade; previously on 3/14/2006 Assigned Baa1

Cl. M-8, Baa2 Placed Under Review for Possible Downgrade; previously on 12/23/2005 Assigned Baa2

Cl. M-8A, Baa2 Placed Under Review for Possible Downgrade; previously on 3/14/2006 Assigned Baa2

Cl. M-9, Baa3 Placed Under Review for Possible Downgrade; previously on 12/23/2005 Assigned Baa3

Cl. M-9A, Baa3 Placed Under Review for Possible Downgrade; previously on 3/14/2006 Assigned Baa3

Cl. B-1, Ba1 Placed Under Review for Possible Downgrade; previously on 12/23/2005 Assigned Ba1

Cl. B-1A, Ba1 Placed Under Review for Possible Downgrade; previously on 3/14/2006 Assigned Ba1

Smart Home Reinsurance 2006-1 Limited

Cl. M-2, Aa2 Placed Under Review for Possible Downgrade; previously on 6/12/2006 Assigned Aa2

Cl. M-3, Aa3 Placed Under Review for Possible Downgrade; previously on 6/12/2006 Assigned Aa3

Cl. M-4, A1 Placed Under Review for Possible Downgrade; previously on 6/12/2006 Assigned A1

Cl. M-5, A2 Placed Under Review for Possible Downgrade; previously on 6/12/2006 Assigned A2

Cl. M-6, A3 Placed Under Review for Possible Downgrade; previously on 6/12/2006 Assigned A3

Cl. M-7, Baa1 Placed Under Review for Possible Downgrade; previously on 6/12/2006 Assigned Baa1

Cl. M-8, Baa1 Placed Under Review for Possible Downgrade; previously on 6/12/2006 Assigned Baa1

Cl. M-9, Baa3 Placed Under Review for Possible Downgrade; previously on 6/12/2006 Assigned Baa3

Cl. B-1, Ba1 Placed Under Review for Possible Downgrade; previously on 6/12/2006 Assigned Ba1

A list of these actions including CUSIP identifiers may be found at:

Excel: http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBS_SF171740

For more information please see www.moodys.com.

New York
Debashish Chatterjee
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Odile Grisard Boucher
Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's takes action on $561 million of synthetic subprime transactions
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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.

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