As losses and delinquency have climbed on government-insured and government-guaranteed mortgages, residential mortgage-backed securities backed by government loans have been hit with downgrades. Still, government guarantees and insurance mitigate losses to investors.
Moody’s Investors Service reported a number of recent downgrades to government RMBS.
Typically, around 80 percent of loans backing government RMBS are insured by the Federal Housing Administration, while 20 percent are guaranteed by the Department of Veterans Affairs, according to Moody’s.
Delinquency of at least 60 days on securitized government loans stands at around 36 percent for 2006 vintage RMBS, while the rate is 45 percent on 2007 issuances. Cumulative losses, which are much lower due to government backing, stood at 0.45 percent as of May for the 2006 vintage and 0.34 percent for 2007 issuances.
Still, only 66 percent of eligible foreclosure costs are paid under the FHA insurance, leaving some additional losses to be borne by bondholders. Coverage provided by the VA is generally limited to 25 percent to 50 percent of the unpaid loan balance, depending on loan size, and accrued interest and foreclosure expenses.
“Given the severe housing market value declines, these guaranteed amounts may represent insufficient protection against high loss severities experienced by loans of comparable size and credit quality,” the ratings agency said. “Moody’s expects loss levels on FHA-VA pools to rise further as the general level of remaining delinquencies remain elevated and loss severities increase.”
In a prior warning about potential downgrades to 42 government mortgage-backed deals, Moody’s noted that negative equity on government-backed loans is likely on a majority of FHA borrowers due to high loan-to-values.
In downgrading the following tranches, Moody’s cited higher expected pool losses in relation to available credit enhancement.
- 101 ratings from 11 SASCO deals securitized between 2002 and 2007;
- 97 tranches from 11 Countrywide transactions for $1.9 billion issued between 2002 and 2006;
- 81 classes of GSMPS Mortgage Loan Trust issued between 2002 and 2006;
- 39 certificates from four MASTR Reperforming Loan Trust FHA – VA deals issued in 2005 and 2006;
- 26 ratings from NAAC Reperforming Loan Remic Trust 2004-R3 and NAAC Reperforming Loan Remic Trust Certificates, Series 2004-R1 and Series 2004-R2;
- 14 classes of WaMu Mortgage Pass-Through Certificates 2004-RP1; and
- four tranches from RBSGC Mortgage Loan Trust 2005-RP1.
But Moody’s did upgrade five tranches for $3 million from three SASCO government transactions “due to the strong tranche-specific credit enhancement available relative to expected losses on these deals.”
