Last week continued the plethora of rating movements - both positive and negative - for the RMBS and CDO sectors. The different rating agencies not only made several rating changes but altered their rating methodologies as well.
For its part, Standard & Poor's announced changes to its surveillance of U.S. RMBS transactions backed by closed-end second-lien collateral. The revised surveillance assumptions focus on three areas, including current losses to date, losses assumed on currently delinquent loans, and future losses for borrowers who are current with their loan payments.
The rating agency said it will continue to assume that a servicer will generally chargeoff the outstanding loan balance after 180 days of delinquency, applying a 100% loss severity to the defaulted balances. However, to account for the movement of the currently delinquent loans through the delinquency pipeline, S&P will assume that for each transaction, the total aggregate balance of the loans that are 60 days delinquent and 90-plus days delinquent, along with 50% of the balance of the loans that are 30 days delinquent, will be charged off evenly over the next six months. S&P will also assume that once the existing delinquencies have been absorbed by a transaction, it will apply an assumed loss curve for future losses.
Generally, S&P said it expects that 30% of the losses will be incurred in the first 18 months, and total losses will occur over a five-year period. The bulk of the remaining 70% of losses will be assumed to occur over the next one to two years, as the rating agency expected a good portion of the underlying first-lien loans to experience adjustments to their monthly mortgage payments, resulting in a continued stream of second-lien defaults. S&P also adjusted its stress tests, shortening the time periods relative to its subprime review. A cash flow analysis that matches prepayment speeds approximating the recent historical constant prepayment rates for each transaction to that of its transaction-specific loss projections will be performed.
The rating agency also said that it adopted guidelines for rating new CDO transactions with RMBS exposure, in order to increase levels of credit support. This includes disclosing the ongoing risk to the ratings on the CDO from its underlying U.S. RMBS and CDO collateral.
Continuing a trend that started the week before, S&P placed the ratings on various classes from 19 cash-flow and hybrid CDO transactions on CreditWatch with negative implications after downgrading a large number of classes from first-lien subprime RMBS transactions. S&P followed up these rating actions with downgrades on 418 classes - worth approximately $3.8 billion - of U.S. RMBS transactions backed by U.S. closed-end, second-lien mortgage collateral issued from the beginning of January 2005 through the end of January 2007. The rating agency had already lowered its ratings on 197 classes of U.S. RMBS backed by closed-end, second-lien collateral issued for the same time period, including 127 classes affected by its most recent downgrades. Some of the classes affected by the recent rating actions have been downgraded multiple times for a total of 275 previous downgrade actions, S&P said.
Other downgrades included 93 tranches from 75 U.S. synthetic ABS CDO transactions. All of the synthetic CDOs with lowered ratings had synthetic rated overcollateralization (SROC) ratios that fell below 100% at the current rating levels after the July 12 U.S. subprime first-lien RMBS downgrades. They now have SROC ratios above 100% at their new, lower rating levels, S&P said.
The other rating agencies were also part of the fray. Dominion Bond Rating Service started the week off upgrading 17 RMBS classes as well as downgrading 94 RMBS classes. The rating agency also placed 15 classes under review with negative implications from 62 RMBS deals as a result of the increased 90-plus day delinquency pipeline relative to the available level of credit enhancement, the rating agency said.
Moody's Investors Service continued its streak of negative rating actions, placing 66 tranches from 33 Alt-A RMBS deals issued in 2005 and 2006 under review for a potential downgrade. The collateral backing these classes is made up mainly of first-lien, fixed- and adjustable-rate mortgages and affects approximately $318 million in securities. The rating actions were taken on securities rated Baa' or lower. Moody's also upgraded 171 tranches from 55 jumbo prime RMBS deals issued from 2003 through 2005, with pool factors lower than 45% as of July 2007. Although the property market has weakened in the past year, and refinancing opportunities have lessened, the jumbo RMBS securitization market has experienced strong continued performance, Moody's said.
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