CMBS Ratings Contrast RMBS

Standard & Poor’s announced it cut ratings on $937 million or 46 tranches from nine U.S. trust preferred CDO transactions partly collateralized by debt issued by mortgage real estate investment trusts. The actions primarily reflect the weakening credit quality of the mortgage REIT assets held within the pools as recent conditions have challenged many mortgage originators and purchasers, including REITs, in obtaining funding to finance their ongoing operations.

Due to collateral deterioration, Fitch Ratings downgraded $416 million or seven classes in notes issued by Lexington Capital Funding III Ltd., which has a revolving portfolio composed of primarily RMBS.

Fitch downgraded $121 million or two classes of MWAM CBO series 2001-1 Ltd. The action on the CDO managed by Metropolitan West Asset Management and composed of ABS, reflects continued collateral deterioration resulting from negative credit migration since the last rating action in February 2006.

Bear Stearns Asset Backed Securities Trust, series 2005-1, had $43.2 million in downgraded classes due to deterioration in the relationship of credit enhancement to future loss expectations, Fitch said.

The two most subordinate classes of subprime Centex Home Equity Loan Trust, Series 2002-D received lower ratings based on low credit enhancement levels compared to current loss projections. Moody’s Investors Service said the credit support is declining due to loan defaults. The transaction has stepped down, causing overcollateralization to be released, and the subordinated certificates have started receiving unscheduled prepayments.

Fitch’s updated subprime loss forecasting assumptions led to downgrades on $71 million in classes of Residential Asset Mortgage Product Inc. 2006-RS3, 2005-RS1 Group 2, and 2005-RS4.

Moody’s placed under review for possible downgrade six subordinate and mezzanine classes of CWABS Inc Asset Backed Certificates Series 2002-BC2, 2003-BC1 and 2003-BC2 because existing credit enhancement levels may be low given the current projected losses on the underlying pool. The three deals, backed by first-lien, fixed-rate subprime loans, have taken losses causing gradual erosion of overcollateralization or the non-rated subordinate classes.

Four tranches of Citigroup Mortgage Loan Trust, Series 2003-HE3 and HE4 also face cut ratings from Moody’s because they have experienced higher than anticipated delinquencies and losses. Moreover, the second of these subprime transactions has experienced erosion of overcollateralization as a result of the recent pace of losses.

Meanwhile, the commercial mortgage-backed securities sector was showered with upgrades as Moody’s announced CMBS are well-structured to deal with the sector’s liquidity crunch, though issuance of commercial real estate CDOs is expected to fall.

“The design of CMBS structures recognizes the inherent illiquidity of the underlying assets, and thus CMBS deals face relatively few timing-imposed constraints,” Moody’s explained.

Collateral managers will have less need for CMBS CDOs because banks are tightening their credit lines, which in turn also puts a crimp in the availability of the high-yield debt, such as mezzanine loans and B notes.

But cheap liquidity from the first half of this year is not likely to return in the near term, the ratings agency said. When the market stabilizes, Moody’s expects it to be characterized by higher bond spreads and lower issuance from fewer and smaller deals.

“There are few signs at this time of imminent credit distress that would lead to a spike in delinquencies or downgrades in the commercial mortgage sector, largely thanks to strong property market fundamentals,” Moody’s added.

Moody’s gave higher ratings on $100 million in classes of Credit Suisse First Boston Mortgage Securities Corp., Series 2001-CK6, because of increased credit support and a high percentage of defeased loans.

Moody’s also upgraded four classes worth $83 million in CSFBMSC, Series 2002-CKS4. Three were upgraded due to stable overall pool performance, increased credit support and defeasance, and the other because of improved performance of the Arbor Place Mall Loan.

Banc of America Commercial Mortgage Inc., Series 2000-1, saw $83 million in five classes upgraded due to defeasance and increased subordination levels, Moody’s said.

Fitch gave higher ratings on $54 million or two classes of N-45o First CMBS Issuer Corp., series 2003-2, because the amortization of the loans and improved performance of the collateral since the last review.

N-45 First’s Series 2001-1 saw upgrades by Moody’s on two classes worth $36 million due to increased credit support from loan amortization and stable overall pool performance.

About $32 million or four classes of GE Commercial Mortgage Corp., Series 2004-C3 was upgraded because the borrower elected to defease the loan with U.S. government securities on Aug. 23, Moody’s said.

Four classes of COMM 2005-LP5, Series 2005-LP5 also reportedly earned upgrades by Moody’s because of borrower’s election Thursday to defease the loan with such securities.

Fitch said it upgraded the $25 million in classes of GS Mortgage Securities Corp. II series 2004-C1 to reflect improved credit enhancement levels from scheduled amortization and the defeasance of three loans since its last rating action. Fitch additionally noted there are currently no delinquent or specially serviced loans in the deal.

Upgrades on two classes worth $20 million from Prudential Securities Secured Financing Corp., Series 1998-C1, were reportedly issued by Moody’s based on increased credit support and stable overall pool performance.