Moody’s Puts $143 Billion Of Jumbo RMBS On Downgrade Review
Courtesy of Tyler Durden
With the ABX Prime index stirring those willing to take risk on prime residential exposure, Moody’s came out with a report demonstrating why there likely will be a recurring offer on the index. In short:
Moody’s Investors Service has revised its loss projections for US prime jumbo residential mortgage backed securities (RMBS) issued between 2005 and 2008. On average, Moody’s is now projecting cumulative losses of 3.8% for 2005 securitizations, 8.0% for 2006 securitizations, 10.9% for 2007 securitizations and 12.3% for 2008 securitizations, reported as a percentage of original balance. As a result of the revision, Moody’s has now placed 4474 tranches of jumbo RMBS with an original balance of $234 billion and current outstanding balance of $143 billion, on review for possible downgrade.
Moody’s is also aggressively hiking delinquent loan estimates in the near term.
To estimate losses, Moody’s first projected delinquencies through the second half of 2010. Moody’s estimated that the proportion of contractually current or 30-day delinquent loans today that will become seriously delinquent by the second half of 2010 will be 3.7%, 7.0%, 8.4%, and 9.4% for the 2005, 2006, 2007 and 2008 vintages, respectively.
So much for no taxpayer losses on GSE exposure.
Full Moody’s text:
New York, December 17, 2009 — Moody’s Investors Service has revised its loss projections for US prime jumbo residential mortgage backed securities (RMBS) issued between 2005 and 2008. On average, Moody’s is now projecting cumulative losses of 3.8% for 2005 securitizations, 8.0% for 2006 securitizations, 10.9% for 2007 securitizations and 12.3% for 2008 securitizations, reported as a percentage of original balance. As a result of the revision, Moody’s has now placed 4474 tranches of jumbo RMBS with an original balance of $234 billion and current outstanding balance of $143 billion, on review for possible downgrade.
Moody’s has already taken widespread rating actions on deals backed by jumbo collateral from the 2005-2008 vintages from March through July of this year. The updated loss projections will have the greatest impact on senior securities issued in 2005.
On October 29th, Moody’s announced that it would update certain assumptions underlying loss projections for each of the major RMBS sectors. The rapidly deteriorating performance of jumbo pools in conjunction with macroeconomic conditions that remain under duress prompted today’s announcement. Over the past nine months serious delinquencies (loans 60 or more days delinquent, including loans in foreclosure and homes that are held for sale) on jumbo mortgage pools backing 2005 to 2008 securitizations have increased markedly. Since March, serious delinquencies for the 2005, 2006, 2007 and 2008 vintages have increased to 3.2% from 2.1%, 6.0% from 3.8%, 7.6% from 4.8% and 7.8% from 4.6% respectively (reported as a percentage of original pool balance).
Even though the Case-Shiller index in recent months has reported very modest home price gains, Moody’s believes the overhang of impending foreclosures will impact home prices negatively in the coming months. Moody’s Economy.com (MEDC) expects home prices to decline an additional 9% to reach a peak-to-trough decline of approximately 37%. Adding to borrowers’ financial pressure, unemployment is now projected to peak at around 10.6% from previous projections of 9.8% from the first quarter of this year. Both measures are expected to reach their peaks sometime in the second half of 2010, after which recovery is expected to be slow.
Estimation of Losses
To estimate losses, Moody’s first projected delinquencies through the second half of 2010. Moody’s estimated that the proportion of contractually current or 30-day delinquent loans today that will become seriously delinquent by the second half of 2010 will be 3.7%, 7.0%, 8.4%, and 9.4% for the 2005, 2006, 2007 and 2008 vintages, respectively.
Growth in new delinquency levels beyond the second half of 2010 is expected to decline with improving economic and housing conditions. To estimate delinquencies beyond 2010, Moody’s decelerated the new delinquency rates by 15% for 2011, 25% for 2012, 35% for 2013 and 40% for 2014 and beyond. The deceleration rates reflect home price, unemployment and foreclosure projections from MEDC beyond 2010.
To calculate the default rate on the projected delinquencies, Moody’s assumed an average roll rate (probability of transition from delinquency into default) of 88%. The loss on the loan upon default (severity of loss) is expected to be around 50% on average — this is higher than historical severities as home prices are expected to depreciate further.
In addition, the government’s effort to curb loan defaults and foreclosures through loan modification has failed to gain traction; prompting Moody’s to reduce the average modification benefit to projected losses across vintages from 15% in March to less than 5% going forward.
Moody’s will release a special report in the coming weeks that will detail its methodology for determining revised loss projections for jumbo transactions issued from 2005 to 2008.
Rating Actions
To assess the rating implications of the updated loss levels on jumbo RMBS, Moody’s will analyze each transaction through a variety of scenarios in the Structured Finance Workstation (SFW), the cash flow engine provided by Moody’s Wall Street Analytics. The scenarios incorporate ninety-six different combinations of loss levels, loss timing (CDR)and prepayment (CPR) curves.
On senior securities, the extent of rating actions due to the revised loss projections will vary by vintage. Currently, over 70% of the senior securities issued in 2005 maintain investment grade ratings. Moody’s anticipates a majority of these ratings to migrate to Ba/B ratings. However, over 70% of the senior securities issued in 2006 and 2007 are already rated below investment grade and consequently are expected to experience smaller rating migrations. In general, bonds that have a short estimated life or are supported by other senior securities will more likely see smaller rating transitions. The rated subordinated tranches from 2005 to 2008 vintages have already been downgraded to Ca or C.
Moody’s rates securities B2 or higher if they are likely to be paid off under an expected scenario. If a security is likely to take a loss under an expected scenario, it will typically be rated B3 or lower. Securities with expected recoveries of 65% to 95% are rated in the Caa range. Securities with expected recoveries of 35% to 65% are rated Ca, while securities with expected recoveries below 35% are rated C.
Other methodologies and factors that may have been considered in the process of rating this issue can also be found at www.moodys.com in the Rating Methodologies subdirectory.
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