RMBS Volume Soars in 2005

Standard & Poor’s reported Tuesday that issuance of private-label RMBS in 2005 jumped to $1.2 trillion — nearly 38% above 2004 issuance volume.

S&P noted the amount included securities backed by Alternative-A loans of $332.3 billion — 109% over the record in 2004.

The milestone activity came despite a leveling in residential mortgage originations, which improved slightly to $2.787 trillion last year from $2.772 trillion in 2004, according to the report.

The New York-based ratings agency also said it rated a record 1,531 new transactions that contained an unprecedented 10,775 credit classes.

Of 17,674 credit classes outstanding at the beginning of last year, 91.45% maintained their credit ratings, S&P reported.

RMBS credit classes secured 1,417 upgrades, which is 10% fewer than in 2004. Prime jumbo transactions received 64% of the improved ratings, while subprime collateral accounted for 17% — which is 57% more than in 2004 — and Alt-A captured 12%. Risk transfers, closed-end second liens, second-lien high combined loan-to-value, and reperforming collateral received most of the remaining upgrades, according to the report.

Downgrades amounted to 150 — 117% more than in 2004 and the most since 2000 when 164 ratings were lowered. And while most of the prior years’ downgrades were due to guarantor ratings, last year held the most performance-related downgrades in a single-year.

Subprime deals accounted for 56 of the downgrades, prime jumbo for 45 and Alt-A for 32, with each of these collateral types experiencing significant downgrade increases over 2004: 56%, 165% and 433%, respectively. S&P noted that the subprime collateral share of total downgrades was lower than in 2004, “an ongoing trend for this sector.”

The ratings agency expects the “frenzied pace of U.S. private label RMBS issuance to cool slightly in 2006” to $900 billion, the second-highest in history.

S&P believes that affordability products such as option adjustable-rate mortgages, interest-only loans, and “piggyback seconds,” are “increasing risks that may contribute to deteriorating credit quality in U.S. RMBS transactions, and these risks have a higher probability of being triggered in the upcoming year,” according to the report.

However, the anticipated total issuance “volume will be driven by reasonably low interest rates, stable home prices, continued favorable demographic factors, and receptive capital markets — all underscored by strong rating performance, with upgrades once again outpacing downgrades in each of the rating categories,” S&P said.