Deluge of Downgrades

On Friday, Standard & Poor’s Ratings Services announced it downgraded 1,413 of U.S. residential mortgage- backed securities backed by first-lien subprime mortgages issued from the beginning of the fourth quarter 2005 through the yearend 2006. The securities had an original par value of $22 billion, accounting for about 4 percent of the $554.4 billion of U.S. RMBS backed by first-lien subprime mortgage loans rated by S&P during that period.

The move was based on the expectation of worsening delinquencies and losses on the underlying loans, S&P said. Cumulative losses to date have jumped to 69 basis points from 29 BPS since its July 2007 review. On average, 60 percent to 70 percent of the collateral consists of mostly hybrid adjustable-rate mortgages.

Downgrades on subprime deals recently announced by Moody’s Investors Service included GSAMP Trust 2002-HE and 2004-HE1, HE2 and SEA2; Aegis Asset-Backed Securities Trust, Mortgage Pass-Through Certificates, Series 2004-6; and RAMP Trust, Series 2002-RS1 and RZ2. While potential downgrades are possible for tranches of RAMP Series 2003-RS9, RASC Series 2003-KS6 and KS3 Trust; Structured Asset Investment Loan Trust in 2005; Park Place Securities Inc., Asset-Backed Pass-Through Certificates, Series 2005-WCW1; Ameriquest Mortgage Securities Inc., Series 2005-R1 and R3; MASTR Asset Backed Securities Trust 2005-WMC1; Home Equity Asset Trust 2005-3 Home Equity Pass-Through Certificates Series 2005-3; Securitized Asset Backed Receivables LLC Trust 2005-EC1; and First Franklin Mortgage Loan Trust 2005-FFH1 and two FFH2 tranches.

Meanwhile, inadequate credit enhancement provided by subordination, overcollateralization and excess spread relative to expected losses affected home equity line of credit loan-backed deals issued by GSR Mortgage Loan Trust 2005-HEL1 with downgrades on two certificates and potential downgrades for four certificates; SACO I Trust, series 2006-1 and 12 with downgrades on eight certificates; Home Equity Mortgage Trust 2006-2 with possible downgrades of two classes, Moody’s reported.

Inadequate enhancement levels and excess spreads were cited by Moody’s for downgrades on classes of subprime, second-lien-backed deals, including MASTR Second Lien Trust; Merrill Lynch Mortgage Investors Trust, series 2005-NCA, NCB, and SL1 through 3; and the following closed-end, second-lien-backed deals: Morgan Stanley Mortgage Loan Trust 2005-8SL; and Nomura Asset Acceptance Corporation, Alternative Loan Trust, Series 2005-S1 through 4. Potential lower ratings for such reason could be possible for subprime, first-lien-backed deals ACE Securities Corp. Home Equity Loan Trust, Series 2005-HE3 and 2.

Moody’s placed on review for possible downgrade the ratings of 11 tranches issued in five Credit Suisse mortgage transactions. The primarily first-lien-backed tranches have experienced an increasing proportion of severely delinquent loans while the amount of available credit enhancement has been reduced from losses and step-down. Affected deals include Credit Suisse First Boston Mortgage Securities Corp. Series 2002-HE11, CSFB ABS Trust Series 2001-HE16 and CSFB Mortgage Pass-Through Certificates, Series 2001-HE17, 2002-30 and 2004-AR6.

Fitch Ratings said deterioration in the relationship between credit enhancement and expected losses resulted in downgrades on approximately $48 million in classes of Morgan Stanley, Series 2001-AM1, NC1 and NC2, 2002-OP1, 2003-NC4 and NC7, and 2004-HE7; about $102 million of GS Mortgage Securities GSAMP Series 2004-AR2 and OPT; $23 million of Residential Asset Securities Corp., series 2004-KS12 Total Group 1 & 2; about $15 million from Meritage Mortgage Corp. 2004-2; over $13 million in AMRESCO 1999-1; $80 million of New Century Mortgage Corp. series 2003-2; about $9 million, including a class on Rating Watch Negative, of ACE Securities Corp., Series 2003-HS1; nearly $18 million in IndyMac Home Equity Mortgage Loan Asset-Backed Trust SPMD, Series 2004-A; $59 million in Asset Backed Funding Corp., Series 2002-NC1 and 2004-OPT4; and $385 million of AMSI, series 2004-R1, 3 and 5, ARSI, series 2003-W2, and PPSI, series 2004-WCW1 and 2.

Ratings actions based on updates Fitch made to its subprime loss forecasting assumptions included downgrades on nearly $178 million from RAMP 2005-EFC1 Total Groups 1 & 2, RS2 Total Groups 1 & 2, RS5 and 6 Total Pools 1 & 2, and SP3; about $201 million from IXIS Real Estate Capital Trust 2005-HE2 through 4; $127 million of ACE 2005-HE4; $119 million Asset Backed Funding Corp. Series 2005-HE1 and 2, WF1 and WMC1; $256 million in Ameriquest mortgage pass-through certificates, Park Place Securities 2005-WCW2 Total; and placement on Rating Watch Negative for a $25 million class of Carrington Mortgage Loan Trust, Series 2005-OPT2.

Two classes of Nomura Asset Acceptance Corporation, Alternative Loan Trust in 2004, series 2004-AP1, may be seeing an upgrade by Moody’s due to strong build-up in credit enhancement. However, this issuer saw seven classes in series 2004-AP2, AR1, AR2, AR3 and AR4 placed under review for possible downgrade because the current credit enhancement provided by subordination, overcollateralization and excess spread is low compared to the projected pipeline losses of the underlying pool, according to Moody’s.

Moody’s said it may be upgrading 10 tranches but downgrading one tranche from several 2004 deals issued by Structured Adjustable Rate Mortgage Loan Trust, which are primarily backed by Alt-A ARM loans originated mostly by Aurora Loan Services Inc. Higher ratings would result from the strong performance of the mortgage pools, while the lower rating would be based on the low credit enhancement level relative to the current projected losses on the underlying pool.

Moody’s downgraded two tranches, may be downgrading 23 tranches, and could upgrade two tranches from several 2002 and 2004 deals with loans originated by Option One Mortgage Corp. Better ratings would result because current credit enhancement, provided by subordination, excess spread, and overcollateralization, is high compared to the current projected losses on the underlying pool, while the negative actions would be based on existing credit enhancement levels relative to the current projected losses on the underlying pools.

On the commercial side, seven classes or $52 million of GMAC 2005-C1 commercial mortgage pass-through certificates were placed on Rating Watch Negative by Fitch because of a significant decline in the value of the largest specially serviced loan, the ratings agency said.

DLJ Commercial Mortgage Corp., Series 1998-CF1 reportedly received $67 billion in upgrades by Moody’s due to increased credit support from significant loan payoffs.

Another positive is that Fitch expects U.S. asset-backed securities will likely remain reasonably stable even though the remaining portion of the year and 2008 hold a less favorable credit environment of lower consumer spending and slowing income growth. The extent to which the downturn in the mortgage and housing markets will affect ABS sectors depends largely on how changes in consumer spending, employment growth, and increased household debt leverage impact the broader economy. However, no immediate direct effect is seen on the underlying credit quality and rating performance of existing ABS bonds, Fitch said, noting that it has issued a lot more upgrades than downgrades through the first nine months of the year.