Thursday, January 31, 2008

Moody's updates loss projections for 2006 subprime RMBS

(Moody's) announced today that it has revised its expectation of lifetime losses on loans backing 2006 vintage residential mortgage-backed securities (RMBS) to a range of 14% to 18%.

"We are updating our views on the possible loan losses on the 2006 subprime vintage in response to current performance that is proving to be much worse than in prior years and is demonstrating a progressive deterioration," said Moody's Chief Credit Officer Nicolas Weill.

The rating agency, however, cautioned that there remains significant uncertainty around the ultimate losses for these loans, which will depend in part on the rate of loan modifications, the impact of 2008 interest rate resets, and the future state of the US economy.

Such losses are also likely to take some time to materialize. Cumulate loan losses to date on 2006 subprime RMBS are under 1.5%.

"Current losses are still low in part because the loans remain relatively unseasoned and in part because foreclosures are taking longer than in previous years for those mortgages that have already fallen behind," Moody's Weill said.

Moody's also expects significant variation around this average range based on the quality of the originator and the quarter in which the loans were originated. Losses on transactions originated in the fourth quarter, hampered by weaker underwriting standards and already softening real estate prices that inhibited the build-up of home equity, could experience losses over 30% under the agency's worst case scenario.

As a result of these revised estimates, Moody's said that additional negative rating actions are likely on 2006 subprime RMBS. However, these rating adjustments will vary based on current rating, historical performance, quarter of origination, geographic diversification and other qualitative factors. Moody's will continue to examine the ratings on each of the deals over the next several months and will announce the results on an ongoing basis.

Moody's also noted that nearly two-thirds of the bonds originally rated Baa in 2006 have already been downgraded to B or below. Also about 40% of the bonds rated Aa are already on review for possible downgrade.

The report "Moody's Updates Loss Projections for 2006 Subprime Loans," is available at
Moody's indicated that it will perform similar loan loss projection analyses for 2007 originated subprime RMBS and for 2006 and 2007 Alt-A backed transactions and will make its revised estimates for these classes available in the next few weeks.

"We expect the performance of subprime loans backing the 2007 vintage will be more like the performance of the loans backing the third and fourth quarter vintages of 2006 than that of the loans from earlier in 2006," Moody's Weill concludes.

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