Moody’s Investors Service has put on review for downgrade 1,079 tranches from 299 shifting interest/pro-rata U.S. residential mortgage-backed securities transactions that are reaching or getting closer to the end of their terms, based on surveillance methodology published this month.
“Securities being placed on review for downgrade are those that show sensitivity to a preliminary stress scenario analysis. We will resolve the watch action after conducting a detailed review of the transaction structures. In addition, we will take into account updated performance information,” Moody’s analysts said in recent report.
Collateral backing the tranches are jumbo, alternative-A credit, payment-option adjustable-rate mortgages, manufactured housing, and scratch and dent.
Deal vintages affected range from 1994 through 2007, current ratings are investment grade and as high as Moody’s top rating.
Issuers affected include certain securitization vehicles with the names ABN Amro, Banc of America, Bear Stearns, Cendant, Chase, CHL, Citi, Coast S&L, CSFB, CWMBS, First Horizon, Fund America Investors Corp., Deutsche Mortgage Securities, DSLA, GE Capital, GMAC, Green Tree Financial Corp., GSR, Harborview, Impac, JPMorgan, MASTR, Merrill Lynch, Morgan Stanley, Mortgage Pass-Through Certificates (MLMI), MRFC, Nomura, Ocwen, PHH, Prime Mortgage Trust, Provident Funding, RALI, RAMP, Real Estate Synthetic Investment Securities, RESI, RFMSI, RFSC, SACO, SBMS, Sequoia Mortgage Trust, Structured Adjustable Rate Mortgage Loan Trust, Structured Asset Mortgage Investments, Structured Asset Securities Corp., Thornburg, Vanderbilt Mortgage and Finance, WaMu and Washington Mutual, Wilshire and Wells Fargo.
“The ratings reflect the exposure of these bonds to tail risk due to the pro-rata pay nature of the transactions,” the company’s researchers said. “Tail risk is the risk of a disproportionately large loss (based on current balance of the pool) on the underlying pool at the end of a transactions' term when few loans remain in the pool and credit enhancement although high in percentage terms may be very low in dollar terms.
“Shifting interest transactions in which the subordinate bonds receive a portion of prepayment and principal, and where there are no credit enhancement floors, expose the most senior bonds to tail risk by depleting the dollar credit enhancement available to absorb future losses. Tail risk on pro-rata structures has been exacerbated recently as high prepayments have paid down pools faster and clean-up calls by issuers (at 10% pool factor) have diminished.”
The principal methodology used in the ratings was published after a review period this spring that closed about a month ago.