Moody's Investors Service has downgraded the ratings on 162 tranches and confirmed the ratings on 23 tranches from 17 RMBS deals that are backed by option arm loans issued by Lehman XS Trusts.

The collateral backing these deals comprises mostly first-lien, adjustable-rate, negative amortization, Alt-A residential mortgage loans. The actions due to the rapidly deterioratin

The actions reflect Moody's updated loss expectations on option arm pools issued from 2005 to 2007.

To assess the rating implications of the updated loss levels on option ARM RMBS, each individual pool was run through a variety of scenarios in the Structured Finance Workstation, which is the cash flow model that was developed by Moody's Wall Street Analytics.

This individual pool level analysis incorporates performance variances across the different pools as well as the structural features of the deal. The scenarios include ninety-six different combinations making up six loss levels, four loss timing curves and four prepayment curves.

For those securities insured by a financial guarantor, the Moody's rating on the securities is the higher of the guarantor's financial strength rating and the current underlying rating (i.e., without considering the guaranty) on the security.

The principal methodology the rating agency used to determine the underlying rating is the same methodology for rating securities without a financial guaranty and is as described earlier. RMBS securities wrapped by Ambac Assurance Corp. are rated at their underlying rating without considering oAmbac's guaranty.

According to Moody's, the primary source of assumption uncertainty is the current macroeconomic environment, in which unemployment remains at high levels, and weakness persists in the housing market. Moody's noted that there is an more potential for a double-dip recession, which could cause a further 20% home price drop compared with its baseline assumption of roughly 5% further dip.

Overall, Moody's assumes a further 5% drop in home prices with stabilization in early 2011, along with continued stress in national employment levels through that timeframe.

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