S&P Lists RMBS Facing Downgrades Based on Revised Criteria
Expects to downgrade 75% of affected 2008 AAA ratings to junk status.
Standard & Poor’s has published details of the 2008 US residential mortgage-backed securities transactions backed by prime, Alternative-A , and subprime mortgages that are likely to be downgraded under new ratings criteria that reflect greater-than-expected housing price declines.
Excerpts:
Upon implementation of these new criteria, we have placed the ratings on 190 U.S. RMBS tranches—with an approximate current outstanding balance of $6.5 billion—on CreditWatch negative (to view the affected classes see “U.S.
RMBS Transactions Affected By The Sept. 10, 2009, RMBS Criteria Revisions).
Our preliminary estimates are that these outstanding RMBS will experience an average downgrade of 11 notches. In addition, we anticipate lowering about 75% of the current ‘AAA’ ratings on these bonds to a non-investment-grade rating.
The performance of the mortgage loans underlying these RMBS further supports these rating actions because the 2008 vintage loans are experiencing delinquency levels comparable to the 2007 and earlier vintages. Based on this performance data, our loss projections generally exceed the credit support levels in these RMBS. We will begin reviewing the affected ratings under the new criteria and adjust the ratings as appropriate over the next three months.
The loans supporting these 2008 transactions generally aren’t sufficiently seasoned for us to base our lifetime loss projections solely on performance trends. Instead, we will determine our loss projections by using a blended analysis, as described in the criteria article. We will evaluate the transactions’ credit quality according to the new criteria and estimate the credit enhancement levels that are commensurate with the various ratings. We anticipate that these new credit enhancement levels will, in most cases, be significantly higher than the transactions’ current available credit enhancement.
Because of the continued weakening of the housing market, we have revised the impact of loan-to-value ratio (LTV) and combined LTV on our foreclosure-frequency and loss-severity calculations. The changes effectively increase our standard market value decline assumptions through adjustments to our Housing Volatility Index (HVI). The HVI adjusts market value declines at the Metropolitan Statistical Area (MSA) level. The new assumptions will essentially increase the amount of assumed market value decline in each of the 379 MSAs covered by our HVI.
For details of the criteria see: Criteria Structured Finance RMBS: Methodology And Assumptions For Rating U.S. RMBS Prime, Alternative-A, And Subprime Loans
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