Jumbo Performance Leads Strong RMBS Sector

While the U.S. asset-backed securities and commercial mortgage-backed securities sectors also experienced an increased number of raised ratings, it was the RMBS market which continued to be the “standout leader in terms of upgrades, as evidenced by 393 raised ratings during the first quarter, all of which were performance related,” according to Standard & Poor’s Structured Finance Global Ratings Roundup Quarterly: First-Quarter and 2005 Performance Trends report.

Those upgrades and 31 performance-related downgrades gave the RMBS market a total of 424 rating changes last quarter — the third highest ever recorded for this sector, making the upgrade-to-downgrade ratio 13 to one. There were 43 more changes — 35 being upgrades — than in the previous quarter and when comparing to the first quarter 2004, there were 34 more changes — nine upgrades and 25 downgrades, S&P said, adding that it “anticipates a continuation of this very active cycle of yearly rating changes for the U.S. RMBS sector.”

The affected collateral types were prime jumbo, Alt A, subprime, closed-end second liens, and nonperforming and reperforming mortgage loans — these last two types had a total of seven changes that were all upgrades. The home equity sector accounted for 28% of the changes, while transactions backed by prime collateral — jumbo and Alt-A — contributed 70%.

Prime jumbo loans continued to receive the greatest number of upgrades, followed by subprime loans, according to the report.

“The strong rating performance in first quarter 2005 illustrates a continuing trend in the RMBS sector during the past 10 quarters,” the ratings agency said.

“The catalysts for such robust rating activity continue to include extraordinarily fast principal prepayments (driven by mortgage loan interest rates that are near a 45-year low), seasoning of the underlying mortgage loans, the shifting interest features of the transactions, market value appreciation, moderate delinquencies, and low losses,” it added.

More than half of the first quarter’s total ratings changes and upgrades occurred in prime jumbo classes, which received 234 upgrades and only nine downgrades. The upgrade-to-downgrade ratio widened from the previous quarter for prime jumbo collateral because the number of improved ratings increased by 55, while the amount of lowered ratings was unchanged. Among the prime jumbo classes, the most common raised rating was to ‘AAA’, which accounted for 57 upgrades, followed by ‘AA+’ as the second most frequent with 42, the report said.

While jumbo performance has improved, jumbo loan originations and issuance are expected to take the biggest hit from rising rates — falling from $225 billion in 2004 to $160 billion in 2005, S&P recently reported.

Of the 12 different prime jumbo issuers that received upgrades, S&P said the most were for Bear Stearns ARM Trust with 42, followed by Bank of America Mortgage, Chase Mortgage Finance Trust, CHL Mortgage Pass-Through Trust, Credit Suisse First Boston, ABN AMRO Mortgage Corp., MASTR Asset Securitization Trust, Bank of America Funding, Citicorp Mortgage Securities Inc. and others.

Of the nine prime jumbo downgrades, seven reportedly came from five transactions issued by Credit Suisse. Six of the issuer’s lowered ratings were on publicly rated classes.

However, within the three issuers that received upgrades on transactions backed by Alt-A loans in the first quarter, Credit Suisse captured the majority — 42 — followed by Alternative Loan Trust and Manufacturers and Traders Trust Co. Mortgage Trust. The Alt-A sector had a total 51 upgrades — all performance-related and with most common raise being to ‘AAA’ — and only three downgrades during the quarter. Compared to the fourth quarter last year, however, the ratio was narrower because the number of Alt-A upgrades declined by six and for downgrades increased by two.

In the home equity sector, S&P said RMBS backed by subprime collateral received 99 raised ratings and 19 downgrades, and those backed by closed-end second liens received two upgrades, with all being performance-related. While the number of subprime upgrades increased from the prior quarter by 27, the number of downgrades more than doubled from 9.

Ameriquest Mortgage Securities Inc. captured the most — 28 — subprime upgrades, followed by Amortizing Residential Collateral Trust, Merrill Lynch Mortgage Investors, Option One Mortgage Loan Trust, GSAMP Trust, MASTR Asset Trusts (six) and ten other issuers. Subprime RMBS ratings were most frequently raised to ‘AAA’ (33), followed by 21 raised to ‘AA+’, the ratings agency reported.

The subprime securitization downgrades — of which 12 of the 19 were moved below ‘B’– occurred among seven issuers, including Home Equity Mortgage Loan Asset-Backed Trust, Delta Funding Home Equity Loan Trust, Long Beach Mortgage Loan Trust, Aames Mortgage Trust, Amresco Residential Securities Corp. Mortgage Loan Trust, and Cityscape Home Equity Loan Trust, according to the report.

The ratings on the two transactions backed by closed-end second liens issued by Credit Suisse Mortgage Securities Corp. were raised to ‘AAA’ and ‘AA’, respectively, from ‘A’, reflecting appreciating credit support, on a percentage basis, for each of the classes as well as the good performance of the underlying collateral, S&P said.

A total of five upgrades were for nonperforming collateral, which refers to those loans that are severely delinquent or in default at the time of securitization, two were private ratings and the other three were public ratings raised on classes by Salomon Mortgage Loan Trust. For reperforming, which refers to loans that may have a history of being delinquent or in default, but are current at the time of securitization, there were two public ratings that were raised.

S&P noted that it released an updated Servicer Evaluation Analytical Model for residential Select Servicers during the first quarter. The model’s questionnaire has two new sections and includes definitions and comments embedded in more than 300 data fields that allow servicers to view an explanation of data the ratings agency requests from them.

The ratings agency also made a note of the monitoring going on in predatory lending and servicing, citing the examples of a recent Business Week issue that said 31 states have enacted some form of predatory lending legislation since 1999 and the recently drafted Ney-Kanjorski bill that seeks to create a national standard that would protect consumers from the abusive practices.