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Rating Action:

Moody's takes actions on Bayview's small business ABS

28 Mar 2014

Approximately $449.7 million of asset-backed securities affected

New York, March 28, 2014 -- Moody's Investors Service has upgraded the ratings on six tranches, and downgraded the ratings on eleven tranches from nine securitizations of small business loans issued by Bayview Commercial Asset Trusts. The loans are secured primarily by small commercial real estate properties in the U.S. owned by small businesses and investors.

Complete rating actions as follow:

Issuer: Bayview Commercial Asset Trust 2003-2

Cl. M-2, Upgraded to Ba3 (sf); previously on May 31, 2012 Downgraded to B1 (sf)

Cl. B, Upgraded to B2 (sf); previously on May 31, 2012 Downgraded to B3 (sf)

Issuer: Bayview Commercial Asset Trust 2005-1

Cl. B-2, Upgraded to Ba3 (sf); previously on May 31, 2012 Downgraded to B1 (sf)

Issuer: BayView Commercial Asset Trust 2005-4

Cl. M-5, Downgraded to B3 (sf); previously on May 31, 2012 Downgraded to B2 (sf)

Cl. M-6, Downgraded to Caa2 (sf); previously on May 31, 2012 Downgraded to B3 (sf)

Cl. B-1, Downgraded to Caa3 (sf); previously on May 31, 2012 Downgraded to Caa2 (sf)

Issuer: Bayview Commercial Asset Trust 2006-3

Cl. M-4, Downgraded to Ca (sf); previously on May 31, 2012 Downgraded to Caa3 (sf)

Issuer: Bayview Commercial Asset Trust 2007-1

Cl. M-4, Downgraded to Caa2 (sf); previously on Sep 13, 2012 Downgraded to Caa1 (sf)

Cl. M-5, Downgraded to Caa3 (sf); previously on Sep 13, 2012 Downgraded to Caa2 (sf)

Issuer: Bayview Commercial Asset Trust 2007-4

Cl. A-1, Downgraded to Ba2 (sf); previously on May 31, 2012 Downgraded to Ba1 (sf)

Cl. A-2, Downgraded to B3 (sf); previously on May 31, 2012 Downgraded to B2 (sf)

Cl. M-1, Downgraded to Caa2 (sf); previously on Oct 31, 2013 Downgraded to Caa1 (sf)

Issuer: Bayview Commercial Asset Trust 2007-5

Cl. A-4, Downgraded to Caa2 (sf); previously on Oct 31, 2013 Downgraded to Caa1 (sf)

Issuer: BayView Commercial Mortgage Pass-Through Trust 2006-SP1

Cl. A-2, Upgraded to Aaa (sf); previously on May 31, 2012 Downgraded to Aa1 (sf)

Cl. M-1, Upgraded to Aa2 (sf); previously on May 31, 2012 Downgraded to Aa3 (sf)

Cl. M-2, Upgraded to A2 (sf); previously on May 31, 2012 Downgraded to A3 (sf)

Issuer: Bayview Commercial Mortgage Pass-Through Trust 2006-SP2

Cl. B-1, Downgraded to Caa2 (sf); previously on May 31, 2012 Downgraded to Caa1 (sf)

RATINGS RATIONALE

The upgrade actions were prompted by a build-up in credit enhancement due to non-declining overcollateralization, in the case of Bayview 2006-SP1, non-amortization of the subordinate tranches, and availability of excess spread in combination with relatively stable collateral performance.

The downgrades are generally due to continued realized losses on the underlying pools in combination with depleted credit enhancement from overcollateralization and subordinate tranches. Over the past year, cumulative net losses for Bayview 2005-4, 2006-3, 2007-1, 2007-4, 2007-5, and 2006-SP2 increased to a range of 21 to 30% as of the March 2014 distribution date from a range of 17 to 25% as of the March 2013 distribution date, in each case as a percent of the original pool balance. For the pro-rata pay deals, as a result of continuing losses, Moody's believes that the remaining amount of time the lower subordinate tranches which have been downgraded to Caa3 or Ca ratings will receive principal payments is limited.

Over the past 12 months for the Bayview portfolio excluding the Canadian transactions, delinquencies of 60 days or more, including loans in foreclosure and REO, decreased to 17% of the outstanding pool balances from 21%. Average severities are still high in the 75% to 80% range. Despite a modest rebound in small balance commercial property values, delinquencies remain at these fairly high levels due to newly delinquent loans and re-defaults by modified loans. Recoveries on loans stemming from liquidated properties are expected to trend modestly higher because of shorter REO timelines and higher commercial property values. However, expenses such as foreclosure costs, property maintenance and accumulated servicer advances continue to limit recoveries to the trust.

A key factor in Moody's updated loss projections is its evaluation and treatment of modified loans. Bayview Loan Servicing has modified approximately 50% to 55% of the loans it now classifies as current in the deals affected by today's rating actions. 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.

METHODOLOGY

The principal methodology used in these ratings was Moody's Global Approach to Rating SME Balance Sheet Securitizations published in January 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING:

Up

Levels of credit protection that are higher than necessary to protect investors against current expectations of loss could drive the ratings up. Losses could decline below Moody's expectations as a result of a decrease in seriously delinquent loans and lower severities than expected on liquidated loans.

Down

Levels of credit protection that are insufficient to protect investors against current expectations of loss could drive the ratings down. Losses could rise above Moody's expectations as a result of an increase in seriously delinquent loans and higher severities than expected on liquidated loans.

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.

For the lower subordinate tranches, Moody's identified relatively near term future writedowns by examining the current pace of writedowns and the expected losses from loans in foreclosure and REO in relation to a tranche's available credit enhancement.

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 a stress period of 15 months. 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 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.

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. In the deals affected by today's rating actions, roughly 50-55% of loans classified as current have been modified by Bayview Loan Servicing and are now classified as current. For delinquent loans, the lifetime default rates range from 20% to 60% depending on delinquency and modification status. For loans in foreclosure or REO, the lifetime default rates are roughly 45% to 65% and 95% to 100%, respectively, depending on vintage and modification status.

For loss severities, Moody's generally applied recent severities for the stress period of the loss calculation. Recent severities have been, in aggregate, over 87% for non-modified loans and about 75% for modified loans. For the period after the stress period, Moody's applied severities ranging from 65% to 75%. The resulting remaining expected losses are 5.6%, 13.2%, 23.5%, 32.6%, 17.7%, 29.3%, 32.7%, 33.5%, and 25.7% of the original pool balances for the 2003-2, 2005-1, 2005-4, 2006-3, 2006-SP1, 2007-1, 2007-4, 2007-5, and 2006-SP2 deals, respectively.

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.

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.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

Moody's received and took into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments in these transactions and the assessment had a neutral impact on the credit rating.

The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.

The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each rated instrument.

As the section on loss and cash flow analysis describes, Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Max Erick Sauray
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 - Sr Credit Officer/Manager
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 takes actions on Bayview's small business ABS
No Related Data.
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