The U.S. residential mortgage-backed securities (RMBS) market continued to see extraordinary transaction volume in 2005. For the fourth year in a row, activity in the mortgage market caused the transaction records from the previous year to again be broken.
RMBS surveillance activity for the year resulted in 1,567 rating changes: 1,417 performance-related upgrades and 150 performance-related downgrades;
Of the outstanding credit classes at the beginning of 2005, 99.4% were at the same rating level or higher at year-end;
Rates on 30-year fixed-rate mortgage loans hit a low of 5.53% during the week of June 30, 2005, and a high of 6.37% during the week of Nov. 17, 2005, averaging about 5.87% for the year (as reported by Freddie Mac);
Estimated originations of residential mortgages in 2005 rose to $2.787 trillion, up slightly from $2.772 trillion in 2004;
Despite the leveling of residential mortgage loan originations, issuance of private-label RMBS in 2005 jumped to $1.2 trillion, reflecting an increase of almost 38% over 2004 issuance volume. Newly issued securities backed by Alternative A (Alt A) mortgage loans totaling approximately $332.3 billion are included in this amount, surpassing the 2004 record by more than 109%; and
During its 28 years of serving the RMBS market, Standard & Poor's Ratings Services has facilitated the historically large volume of 9,450 transactions backed by residential mortgage loans by providing credit ratings to an unprecedented 35,838 credit classes.
Surveillance of RMBS transactions resulted in a record 1,567 rating changes in 2005: 1,417 performance-related upgrades and 150 performance-related downgrades. As has been the case over the past few years, the upgrades were fueled by extraordinarily fast principal prepayments (driven by mortgage loan interest rates near 40-year lows), the shifting interest features of the transactions, increased credit support percentages, stable collateral performance, market value appreciation, moderate delinquencies, low losses, and average seasoning of two years and eight months. Over two-thirds of the downgraded classes had ratings below investment-grade before being downgraded in 2005. The downgraded classes were seasoned an average of three years and seven months.
New Securitization Volume Up, Despite Rate Hikes And Leveling Off In Loan Originations
For the residential mortgage market, 2005 was another record-setting year. Despite the continuing upward movement of short-term rates by the Fed, the average rate on 30-year fixed mortgage loans was 5.87%, only four basis points above the average in 2004 (5.83%). During the week of June 30, 2005, rates hit an annual low of 5.53%. Comparatively, the high of 6.37% was reached during the week of Nov. 17, 2005.
Originations of residential mortgages in 2005 totaled $2.787 trillion, up slightly from $2.772 trillion in 2004. Despite the leveling of residential mortgage loan originations, issuance of private-label RMBS in 2005 jumped to $1.2 trillion (see table 1), reflecting almost a 38% increase over 2004. Issuance in the subprime sector reached almost $465 billion, as it continued to benefit from the combination of an increasing number of leveraged borrowers and aggressive lenders willing and able to extend credit to these borrowers. Issuance volume in the Alt A sector more than doubled over the previous year to more than $332 billion, largely due to the sustained popularity of innovative loan products.
Continuing to facilitate the dramatic expansion of the new issuance market, Standard & Poor's provided credit ratings for a record 1,531 new transactions that contained an unprecedented 10,775 credit classes (see tables 2, 3, and 4). In the tables below, table 2 shows cumulative transactions and credit classes as of each year-end, while tables 3 and 4 show yearly new credit ratings that are not cumulative. Also, there are higher percentages for the 'BBB' ratings (compared to 'AAA' ratings) in table 4 for years 2002 through 2005, since there were sometimes more than one 'BBB' rated class (e.g., 'BBB+', 'BBB', or 'BBB-') within the same transaction, whereas all 'AAA' rated classes were only counted as one credit rating. During the 28 years of serving the residential mortgage market, Standard & Poor's has rated 9,450 transactions containing 35,838 credit classes.
Table 1.
Annual Issuance Of U.S. Rated RMBS Underlying Collateral Type, 1978-2005
Year
Prime Jumbo/Alt A (bil. $)
Subprime/Home Equity (bil. $)¶
RMBS Other (bil. $)§
Total (bil. $)
1978
0.7
0.7
1979
0.4
0.4
1980
0.2
0.2
1981
0.1
0.1
1982
0.3
0.3
1983
1.6
1.6
1984
0.2
0.2
1985
2.0
2.0
1986
7.0
7.0
1987
11.1
11.1
1988
15.4
15.4
1989
14.2
2.7
16.9
1990
24.4
5.6
30.1
1991
49.3
10.2
59.6
1992
89.5
6.2
95.7
1993
98.5
7.1
105.6
1994
62.9
10.5
73.3
1995
27.1
19.8
2.1
48.9
1996
34.0
35.9
-
69.9
1997
56.7
61.5
0.9
119.1
1998
119.2
83.2
0.8
203.2
1999
87.4
59.1
1.4
147.9
2000
71.3
62.6
2.1
136.0
2001
158.3
102.6
6.4
267.3
2002
239.4
147.5
27.1
414.0
2003
319.4
215.3
51.6
586.2
2004
413.3
411.7
39.1
864.2
2005*
629.8
525.7
35.7
1,191.3
Sources: Standard & Poor’s, Inside MBS & ABS. *Estimate for 2005. ¶Subprime/home equity include second mortgages, line-of credit home equity loans, conventional home imporvement loans, and high CLTV loans. §Figures for "other mortgages," include Scratch & Dent, FHA-insured Title I home improvement loans, reverse mortgages, and NIMS.
Table 2.
Standard & Poor's U.S. RMBS Credit Ratings, 1978-2005
--Credit Classes--
--Transactions--
Year
Rated
Matured
Year-End Outstanding
Rated
Matured
Year-End Outstanding
1978
7
6
7
6
1979
21
27
21
27
1980
20
47
20
47
1981
21
5
63
21
5
63
1982
24
9
78
24
9
78
1983
45
14
109
41
14
105
1984
37
146
37
142
1985
55
18
183
55
18
179
1986
149
27
305
141
23
297
1987
252
73
484
219
73
443
1988
267
86
665
230
84
589
1989
277
24
918
182
24
747
1990
429
52
1,295
192
51
888
1991
485
32
1,748
305
31
1,162
1992
676
37
2,387
363
29
1,496
1993
624
51
2,960
314
28
1,782
1994
582
149
3,393
302
113
1,971
1995
486
290
3,589
252
93
2,130
1996
483
303
3,769
257
132
2,255
1997
649
201
4,217
321
156
2,420
1998
899
271
4,845
407
160
2,667
1999
674
477
5,042
382
269
2,780
2000
679
451
5,270
322
321
2,781
2001
1,549
410
6,409
452
237
2,996
2002
3,069
718
8,760
687
400
3,283
2003
5,013
1,538
12,235
1,032
705
3,610
2004
7,591
2,152
17,674
1,333
562
4,381
2005
10,775
1,649
26,800
1,531
537
5,375
Table 3.
Standard & Poor's Annual RMBS Credit Ratings By Collateral, 1978-2005
Year
Prime (Jumbo/Alt A) (%)
Subprime/Home Equity* (%)
RMBS Other¶ (%)
Total Credit Ratings
1978
100
7
1979
86
14
21
1980
100
20
1981
86
5
10
21
1982
100
24
1983
93
7
45
1984
68
32
37
1985
64
36
55
1986
94
6
149
1987
96.8
0.4
2.8
252
1988
89
1
10
267
1989
87
4
9
277
1990
93
6
1
429
1991
87
12
1
485
1992
89.8
9.8
0.4
676
1993
88
12
1
624
1994
86
13
1
582
1995
81
19
486
1996
63.8
36
0.2
483
1997
39.6
60.1
0.3
649
1998
57
41
2
899
1999
47
47
6
674
2000
47
42
11
679
2001
58
33
10
1,549
2002
64
27
9
3,069
2003
58
31
10
5,013
2004
46
43
12
7,591
2005
45
46
9
10,775
All years
55
36
8
35,838
*Subprime/home equity include subprime, closed-end second liens, line-of-credit home equity loans, conventional home improvement loans, and high-CLTV loans. ¶RMBS other includes document deficient, outside the guidelines, reperforming, nonperforming, net interest margin securities, reverse mortgages, tax liens, and miscellaneous transactions.
Table 4.
Standard & Poor's Annual RMBS Credit Ratings By Major Rating Category, 1978-2005
Year
AAA (%)
AA (%)
A (%)
BBB (%)
BB (%)
B (%)
CCC (%)
Total Credit Ratings
1978
100
7
1979
24
71
5
21
1980
95
5
20
1981
71
24
5
21
1982
50
50
24
1983
38
62
45
1984
57
41
3
37
1985
35
62
4
55
1986
38
61
1
149
1987
40
60
252
1988
38
57
4
1
267
1989
30
66
2
2
277
1990
26
69
2
3
429
1991
41
48
8
3
485
1992
47
38
9
5
1
1
676
1993
45
27
11
7
5
5
624
1994
47
22
11
9
5
6
582
1995
49
15
11
8
7
10
486
1996
53
12
13
8
6
7
483
1997
48
16
15
13
5
3
649
1998
45
16
13
14
7
6
899
1999
56
13
11
12
4
4
674
2000
44
17
15
15
5
4
679
2001
26
19
18
19
10
9
1,549
2002
20
18
19
22
11
10
3,069
2003
17
18
20
25
10
9
5,013
2004
14
21
22
26
10
7
7,591
2005
12
24
23
25
11
6
10,775
All
21
23
19
21
9
6
35,838
2005 Rating Activity Smashes Records
Of the 17,674 credit classes outstanding at the beginning of the year, 91.45% maintained their credit ratings and 10.55% experienced rating changes. There were 1,510 classes from 520 transactions that were affected by the rating changes, resulting in a record 1,567 rating changes comprising 1,417 upgrades and 150 downgrades, for an upgrade-to-downgrade ratio of 9.45 to 1 (table 5). Among the downgrades, 33 involved defaults, compared with 34 in 2004. (A detailed analysis of rating changes is also analyzed in the quarterly surveillance report, "Structured Finance Global Ratings Roundup Quarterly," for each of the four quarters in 2005.)
Table 5.
Standard & Poor's RMBS Rating Upgrades And Downgrades, 1980-2005
