Standard & Poor’s announced today that it had downgraded 402 classes of U.S. residential mortgage-backed securities (RMBS) backed by first-lien subprime mortgage loans that were issued from the beginning of the first quarter of 2005 through the third quarter of 2005. The downgrades hit a total of $4.6 billion in original par, or 1.45 percent of the $320 billion in first-lien US RMBS rated by agency. S&P also affirmed its ratings on securities representing $252.4 billion original par value of U.S. RMBS backed by first-lien subprime mortgage loans from this same period. Approximately 86 percent of the downgrades affected securities rated in the ‘BBB’ category and below, Standard and Poor’s said. No ‘AAA’ rated first-lien RMBS securities rated during this period were downgraded. From the press release:
Aggregate losses on all first-lien subprime U.S. RMBS transactions that were issued from the beginning of the first quarter of 2005 through the third quarter of 2005 are approximately 92 basis points (0.92%) based on data received in September 2007. This is in contrast with the downgraded transactions which have experienced approximately 104 basis points (1.04%) in aggregate losses — this is 13% higher than the average for this period. This compares with 98 basis points (0.98%) of aggregate losses experienced by transactions issued in 2000, previously the worst-performing vintage of the decade. We expect that the downgraded securities will be particularly vulnerable to increased losses because, on average, 70%-80% of the loans backing them are subject to some type of payment adjustment in the near future. Most of these are 2/1 adjustable-rate mortgages already in their adjustable-rate stage and already past their first and typically largest payment reset.
A couple things to remember — S&P will likely be busy cutting the ratings on other vintages that weren’t hit by today’s announcement, for the exact same reasons that they’re now cutting back on 2005. Moody’s Investors Service, for example, already pulled the trigger here for 2006 first-lien subprime RMBS. And given how the 2007 vintage is performing thus far, we’ll be seeing that vintage getting a haircut of its own soon enough as well, I would suspect. Click here to see all affected deals and classes.
