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.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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