Standard & Poor's announced last week it will begin requiring more credit enhancement for closed-end subprime second-lien mortgages. The rating agency joins Moody's Investors Service in its decision to do so.
Per the new methodology, a 701 FICO deal with a 96.48 CLTV will need 8.1% credit enhancement, compared with 5.45% credit enhancement previously. A 707 FICO deal with a 97.35 CLTV will need 5.05% credit enhancement, up from 3.70% under the earlier methodology. Similarly, a 675 FICO deal with a 97.06 CLTV will require 8.15% credit enhancement, compared with 6.30% earlier, according to examples provided by S&P.
Triple-A tranche sizes would be reduced to 68.30 from 72.25; 74.60 from 75.05 and 70.65 from 73.05 under each of the three scenarios, respectively. The rating agency also revised its NIM cash flow assumptions for transactions that include closed-end second lien loans.
Subprime second-lien performance, particularly for 2006 deals, has been poor out of the gate. The trend has caused a number of headaches for investors with substantial exposure to the asset class, as 2006 pools are rumored to be trading as low as 90 cents on the dollar.
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