As investors anxiously waited last week for Standard & Poor's conference call about rating methodology alterations to closed-end second-lien RMBS, Starship's 1987 hit "Nothing's Gonna Stop Us Now" played over the conference call lines. The song seems very appropriate in light of the endless amount of rating activities and methodology alterations that have hit the market from S&P, Moody's Investors Service and Fitch Ratings. Whether these rating adjustments are sufficient, however, remains to be seen as market players cite little to no activity in the second-lien market.
"Right now, the rating changes and tightening criteria will have more of an effect on the existing deals in the pipeline that have some second-lien concentration," said Wen Zhang in ABS research at Credit Suisse. These deals will basically have to double their credit enhancement levels on the second-lien portion, which will have a noticeable impact on deal execution, she said. But in terms of standalone subprime second-lien deals, "that market is basically dead right now," Zhang said.
Despite the slowdown, ratings are still being reworked. S&P said that is will be increasing its default assumptions by 1.7 times for loans with a CLTV greater than 95. It will also increase its default assumptions for FICO scores lower than 660, depending on the numbers. For FICO scores less than 575, it will increase its assumptions by 4.5 times; for FICO scores less than 600 but greater than 575, it will increase its assumptions by 2.5 times, and for FICO scores less than 660 but greater than 600, it will increase its default assumptions by 1.5 times. FICO scores higher than 660 performed within expectations, the rating agency noted. For purchase money loans, S&P increased its default assumptions by 1.5 times.
As a result of the rating changes, the overcollaterization pool requirements have been increased by 80% and the class size of the triple-A' decreased by about 25%, S&P added.
Among Moody's changes to its second-lien rating methodology, the rating agency will include the addition of higher roll rates from delinquency into default and higher severity assumptions. Previously, roll rates from delinquency to default that were used for loans delinquent more than 60 days were 50% and for loans delinquent for more than 90 days, in foreclosure or held as real estate owned (REO), roll rates were 100%. As a result of the limited borrower equity underlying most 2006 second-lien loans, Moody's said it now assumes that all loans would default with 100% severity. Subsequently, for the remaining portion of the pool that is not more than 60 days delinquent, in foreclosure or held as REO, loss expectations were increased by about 30%.
Moody's also increased default rate assumptions for high CLTV loans and loans originated with less than full documentation in 2006 for securitizations backed exclusively by subprime closed-end second-lien mortgages. If first-lien information is not provided, stressed assumptions are made, and loss expectations are adjusted accordingly, Moody's said. This has resulted in average loss expectations of approximately 15% to 25% of previous levels.
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