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Downgrades Surge on RMBS Vintages
By Ted Cornwell
Last week, rating agency Standard & Poor's lowered the credit rating or placed on watch 133 subordinate classes from securities backed by subprime home loans and home-equity loans that were issued in 2005 and 2006.
The rating downgrades and watches affected 62 different MBS deals from 23 different issuers, indicating that market conditions rather than weak collateral from a particular company were to blame. The deterioration of the subprime sector has been widespread and continues to spook the market, as evidenced by Bear Stearns' extraordinary efforts last week to keep two hedge funds afloat.
S&P downgraded 45 classes backed by closed-end, second-lien collateral, and 27 of those classes were also placed on watch with "negative implications," suggesting the securities could be downgraded further. An additional 46 classes of home-equity securities were placed on negative credit watch as well.
Additionally, S&P took rating actions on 42 other classes backed by subprime mortgage loans. Those actions affected deals issued by 15 different issuers.
Some deals were removed from "watch" status because S&P said the downgrades pushed the rating so low that they were no longer subject to credit watch.
The rating agency said the actions "reflect early signs of poor performance of the collateral backing these transactions." That credit weakness stems from aggressive underwriting, first-time homebuyer programs, piggyback seconds and hybrid ARMs entering the market during 2005 and 2006.
Truth be told, the onslaught of downgrades is more than just an early sign of credit deterioration in the recent subprime and home-equity vintages. It's a confirmation that the credit problems affecting nonprime mortgages continue to plague the market and are far from over. Some of that concern is playing out in Bear Stearns' rescue of two hedge funds heavily invested in subprime mortgages. Bear Stearns reportedly loaned upwards of $3 billion of its own financing to discourage margin calls from other banks that had financed the funds.
S&P said the percentage of loans "severely delinquent" -- that would be 90 days or more -- in the second-lien transactions affected by the rating changes ranged from 3.3% to 18.2%. Cumulative losses have already exceeded 5% on one of the deals.
For affected subprime classes, the severe delinquency rate ranged from 5.27% to 17.06%.
S&P said it will continue to monitor loss rates and that if losses are material and delinquencies remain elevated, further downgrades may be necessary.
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