New York, March 19, 2009 -- Moody's Investors Service has revised its loss projections for residential
mortgage backed securities (RMBS) backed by prime Jumbo mortgages issued
in the US from 2005 to 2008. On average, Moody's is now projecting
cumulative losses of about 1.70% for 2005 securitizations,
3.55% for 2006 securitizations, 5.05%
for 2007 securitizations and 6.20% for 2008 securitizations
(all loss projections are reported as a percentage of original balance
of loans securitized for each vintage). As a result, it has
placed 4,988 tranches of Jumbo RMBS with an original balance of
$240.7 billion and current outstanding balance of $173.3
billion, on review for possible downgrade.
Ratings actions on the senior securities, due to the revised loss
projections, will vary for the different vintages. Approximately
70% of the senior securities issued in 2005 are expected to maintain
investment grade ratings. The remaining senior securities from
this vintage are expected to migrate to Ba/B ratings. A vast majority
of the senior securities issued in 2006 are expected to migrate to a rating
ranging from Baa1 to B3 and, in the case of about 35% of
the senior securities, to ratings below B3. For senior securities
issued in 2007, about 20% are expected to migrate to a Ba1-Ba3
rating. The majority of the senior securities from this vintage
are expected to migrate to ratings below B3. In all cases,
super senior bonds which are supported by other senior securities that
are first in line to take losses once subordinate bonds are written down
will benefit from the additional credit protection and could maintain
investment grade ratings.
Moody's concludes that in most cases, subordinate securities from
2006, 2007 and 2008 transactions will likely be completely written
down. Moody's is likely to downgrade the ratings of these securities
to Ca or C. However, for most Jumbo deals that Moody's
rated from 2005-2008, it was not asked to rate the subordinate
Calculation of Estimated Losses
The rating agency says that during the last six months, Jumbo mortgage
loans backing 2005 to 2008 securitizations have shown substantial increases
in serious delinquencies and decreases in prepayment rates -- levels
that are unprecedented for this asset class. Borrowers who are
60 or more days delinquent on their payments, have had foreclosure
proceedings started against them or properties that are held for sale
comprise 1.6%, 2.9%, 3.6%
and 3.75% for the 2005, 2006, 2007 and 2008
vintages respectively (reported as a percentage of original pool balance).
The quickly deteriorating performance, along with concerns about
the continuing drop in housing prices nationwide and the rising unemployment
rate has prompted Moody's to revise its loss expectations.
Moody's revised loss expectations, however, take into
account the benefit afforded by the recent Housing Affordability and Stability
Plan (HASP) that was announced by the Obama Administration. The
Stability Plan under HASP will help some Jumbo borrowers avoid foreclosure
through loan modification. Accounting for the government actions
resulted in Moody's loss expectations being reduced by approximately
15% for each vintage.
To estimate losses, Moody's first projected delinquency rates
and eventual losses through the end of 2009, when it anticipates
that home prices will reach a bottom in many parts of the US. The
delinquency projections take into account:
i) The erosion in equity that borrowers face due to home price depreciation
experienced so far and expected in the future. Peak-to-trough
home price depreciation has been approximately 25% (based on the
Case-Schiller index) and Moody's Economy.com (MEDC)
projects another 11% decline by the end of the year.
ii) Increase in unemployment rates -- MEDC is projecting
unemployment rates in the US to peak at 9.8% and
iii) Limited refinancing options -- Voluntary prepayments
for the sector are at historical lows. Recent government refinancing
programs have focused primarily on agency-eligible mortgages.
With only a small percentage of jumbo mortgages meeting agency guidelines,
Moody's expects prepayments to remain low for jumbo borrowers in
the near term.
The projected defaults were reduced to take into account the positive
effect of the Stability Plan under HASP. The plan will provide
modification options to some borrowers who took out jumbo mortgages in
2005-2007, as the loan eligibility limit has been set at
$729,750 for single family homes (and higher for 2-4
family homes). Agency loan eligibility limits were considerably
lower than $729,750 in 2005-2007. Moody's
estimates that approximately 15% of borrowers who would have otherwise
defaulted on their mortgages by the end of the year will be able to avoid
default as a result of taking advantage of modifications. This
estimate nets out approximately 30-40% of borrowers who
are projected to re-default after modification of their loan.
Taking the above assumptions into account, Moody's is estimating
that eventual default rates for borrowers who become seriously delinquent
by end of 2009 on jumbo pools from 2005, 2006, 2007 and 2008
vintages will be 2.3%, 3.9%, 5.0%,
and 6.2% respectively (reported as a percentage of original
pool balance). Because Moody's expects a further 11%
decline in home prices, it has assumed average losses on defaulting
jumbo mortgages to be approximately 40% -- which
is higher than historical severities.
To estimate losses beyond 2009, Moody's has taken into account
economic, home price and foreclosure projections from MEDC.
When compared to ultimate default rates in 2009, Moody's estimates
default rates to be 15% lower in 2010, 50% lower in
2011%, 70% lower in 2012 and 90% lower in 2013
and beyond. Moody's has also assumed slightly higher voluntary
prepay rates from 2010 and beyond. The above assumptions are then
translated into a default rate through the remaining life of the deal
after 2009. Based on these assumptions, Moody's is
now projecting cumulative losses of about 1.70% for 2005
securitizations, 3.55% for 2006 securitizations,
5.05% for 2007 securitizations and 6.20% for
Moody's will release a special report in the coming days that will
detail its methodology for determining revised loss projections for Jumbo
transactions issued in 2005, 2006, 2007 and 2008.
In summary, Moody's rates securities B2 or higher if they are likely
to be paid off under an expected scenario. If a security is likely
to take a loss under an expected scenario, it will typically be
rated B3 or lower. To determine ratings that are lower than B3,
an estimated recovery ratio is calculated using available enhancement
and the current priority of principal distribution. Securities
with expected recoveries of 75% to 95% are rated in the
Caa range. Securities with expected recoveries of 25% to
75% are rated Ca, while securities with expected recoveries
below 25% are rated C.
Traditionally, Jumbo RMBS transactions are backed by mortgages that
are considered prime quality but which do not meet the stricter underwriting
guidelines required by Fannie Mae and Freddie Mac for various reasons,
most notably because of their large loan size.
Moody's has already taken widespread rating actions on deals backed by
Jumbo collateral from the 2006 and 2007 vintages in December 2008.
Of about 180 Moody's-rated Jumbo securitizations from these
vintages, over 80% experienced negative rating actions.
In light of the updated loss expectations, Moody's will again review
all outstanding Jumbo ratings from the 2006 and 2007 vintages as well
as the 2005 and 2008 vintages. Rating actions will be released
as individual analyses are completed and a summary will be published upon
completion of the overall review.
A list of the review actions associated with this announcement may be
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Moody's updates loss projections for '05, '06, '07 and '08 Jumbo RMBS
Structured Finance Group
Moody's Investors Service