Citing a "new paradigm" of subprime credit losses, Standard & Poor's last week stepped up its RMBS credit surveillance and simultaneously placed a negative CreditWatch on ratings of 18 subordinate classes from 11 RMBS deals issued in 2006 - both in the subprime and Alt-A sectors. According to S&P, the new rating methodology only affects how soon a deal is placed on rating CreditWatch negative. Previously, the rating agency would not place a deal on rating CreditWatch negative if there had not been a loss to the pool.
"What we are observing with regard to the delinquency and loss represents a new paradigm," said Ernestine Warner, head of S&P's RMBS surveillance group. "We have not seen similar performance in other vintages." S&P said CDO exposure to the 11 affected deals was "minimal," but noted during a conference call last week an initiative to keep the CDO surveillance team abreast of RMBS performance. Three S&P rated hybrid and cash CDOs have exposure to the collateral, although none of the ratings for the deals were placed on CreditWatch negative.
Sources said negative headlines drove subprime lender stocks and the ABX index further down last week, along with the S&P announcement. The news included Brea, Calif.-based ResMAE Mortgage Corp. filing for Chapter 11 bankruptcy and a fourth quarter loss at Accredited Home Lenders, among other events.
Most of the second lien transactions placed on S&P watch were issued in the first half of 2006 - before S&P raised its loss coverage levels for loans with layered risks, such as first-time home buyer programs and piggyback mortgages, in July. The percentage of loans in the pools classified as severely delinquent ranges from 2.77% in the case of Terwin Mortgage Trust 2006-8 to as much as 13.46% in the case of the New Century Home Equity Loan Trust 2006-S1. Several of the pools have zero losses, while the pool with the highest loss percentage - GSAMP Trust 2006-S5 - had lost 1.3%, according to S&P. While three of the affected deals were issued in the second half of 2006, S&P said transactions issued during the second half of 2006 are "generally" passing the stress levels.
Shelves hit the hardest were Structured Asset Investment Loan Trust, with five classes on watch, and Terwin Mortgage Trust, also with five classes on watch.
Those holding subprime second liens - primarily the lower FICO, simultaneous second variety - have been stung by poorer-than-expected performance. Exposure to subprime second liens caused a majority of losses at HSBC, Europe's largest bank, which warned that losses stemming from bad debts in 2006 would be roughly $1.8 billion - or 20% - higher than analyst estimates, triggered largely by poor performance among the subprime ARMs and second liens it holds. According to Dominion Bond Rating Service, closed-end second lien loan losses on average begin as early as the fourth month, with nearly half of all cumulative losses happening in the first 24 months.
Furthermore, Fremont Investment & Loan alerted brokers last week that it would no longer be offering second lien mortgages. Fremont, which has been suffering from poor loan performance and buyback requests, has been in the process of changing its underwriting criteria. The loans typically have a very front-loaded loss-distribution pattern.
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