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NEW YORK (Standard & Poor's) Jan. 15, 2008--Standard & Poor's Ratings Services
today announced that it has revised the assumptions it uses for the
surveillance of U.S. residential mortgage-backed securities (RMBS), and that
the correlation and recovery assumptions used to rate and monitor
collateralized debt obligation (CDO) transactions backed by U.S. RMBS are in
the process of being revised.
We have made three fundamental changes to our surveillance assumptions for
U.S. RMBS.
1.) We extended our stresses of the expected loss amount over the
lifetime of the transactions (compared with the 36-month period we currently
use) to evaluate the adequacy of credit enhancement. Because we expect the
duration of the housing downturn to be longer than previously anticipated, we
believe that using a longer term and corresponding revisions to loss curves
may be appropriate.
2.) We revised our expected losses for the 2006 vintage subprime
collateral to 19% from 14%, as delinquencies continue to rise, and we will
recalculate lifetime loss expectations for all vintages of U.S. RMBS.
Additional losses are projected to result directly for the additional
delinquencies and defaults.
3.) We revised our assumptions on availability of excess spread, as the
increased number of loan modifications will likely reduce future excess spread
available to cover credit losses. These assumptions are consistent with
scenarios recently published in ?Reviewing The Impact Of Rate Freezes On Rated
U.S. First-Lien Subprime RMBS Under Two Scenarios,? which was published on
Dec. 21, 2007.
These revisions reflect the growing economic consensus that U.S. home price
declines will be larger than previously forecasted and that the slump in the
U.S. housing market is expected to last far longer than previously
anticipated. These factors, combined with the persistence of significant
growth in seriously delinquent borrowers, are leading to upward revisions in
loss expectations and greater likelihood that these expectations will be
realized. Loan modifications appear to be gaining traction in the industry,
increasing the likelihood that excess interest in the affected securitizations
will decline and reduce credit enhancement to cover losses.
At the CDO level, we are reviewing the correlation and recovery assumptions we
use for U.S. RMBS securities held within CDO collateral pools. Existing CDO of
ABS transactions with exposure to U.S. RMBS securities could be affected by
these changes in CDO assumptions.
We believe U.S. RMBS transactions backed by subprime loan collateral of all
vintages could be adversely affected by our pending assumption changes,
especially those transactions issued in 2005, 2006, and 2007, as they are
collateralized by mortgage loans that are less seasoned and are more sensitive
to current market conditions. Once we finalize our revised base surveillance
assumptions, we will conduct a review of all outstanding RMBS to determine the
impact of these assumptions on our outstanding ratings.
FACTORS DRIVING REVISED SURVEILLANCE METHODOLOGY
Monthly performance data reveals that delinquencies and foreclosures continue
to accumulate at an increasing rate for the 2006 vintage. Since July 2007,
cumulative losses for all subprime RMBS transactions issued during 2006 have
increased 156% to 1.13%. The cumulative loss amount is based on the original
balance of the transactions. At the same time, total and severe delinquencies
(90-plus days, foreclosure, and REO) have increased 49% and 66%, respectively.
As of the December 2007 distribution date, total delinquencies for the 2006
vintage had increased to 28.79% and severe delinquencies were 18.83% of the
remaining principal balance of the transactions. This delinquency trend has
caused us to increase our expected lifetime loss projection.
PROJECTED VERSUS ACTUAL PERFORMANCE COMPARISON
On Oct. 19, 2007, Standard & Poor's incorporated new default curves into its
surveillance process. We use the default curves to project future defaults and
monthly losses. In order to account for the seasoning of each transaction, the
data is reported by month of issuance. As of the December 2007 distribution
date, foreclosures represented approximately 9.81% of the current pool balance
for the 2006 vintage subprime collateral, which is approximately 3.4% higher
than Standard & Poor's projection of approximately 9.49%. If defaults exceed
our projections for an extended period of time, we may revise our loss
projections to account for the increased credit risk. Significant revisions in
our loss projections usually result in additional rating actions.
Although monthly foreclosures have been exceeding our default projections,
cumulative losses have been below our expectations. As of the December 2007
distribution date, cumulative losses represented approximately 1.13% of the
original pool balance for the 2006 vintage subprime collateral, which is
approximately 44% lower than Standard & Poor's projection of 1.63%. While
monthly losses are currently coming in lower than our original projections, we
believe that the growth in monthly losses will increase significantly in the
upcoming months as servicers start to liquidate properties more aggressively.
The delay in monthly losses will have a negative impact on the transactions as
monthly excess spread, overcollateralization, and subordination are released.
ECONOMIC FACTORS
On a macroeconomic level, we expect the U.S. housing market, especially the
subprime sector, will continue to decline before it improves, and we expect
home prices will continue to come under stress. Recent industry reports reveal
that home prices have declined by approximately 6% since the beginning of
2006. Weakness in the property markets continues to exacerbate losses, with
little prospect for improvement in the near term. Furthermore, we expect
losses to continue increasing, as borrowers experience rising loan payments as
the terms of their adjustable-rate loans reset and the principal amortization
occurs after the interest-only period ends for both adjustable- and fixed-rate
loans. However, we expect many of the affected borrowers to find relief
through loan modifications that will hold initial interest rates constant for
several years. We expect available credit enhancement to decrease as a result
of the loan modifications. Although property values have decreased, we expect
additional declines. David Wyss, Standard & Poor's chief economist, has
adjusted his projection that property values will decline by 8% to 11% on
average between 2006 and 2008, and will bottom out during mid 2008.
Standard & Poor's, a division of The McGraw-Hill Companies (NYSE:MHP), is
the world's foremost provider of financial market intelligence, including
independent credit ratings, indices, risk evaluation, investment research, and
data. With approximately 8,500 employees, including wholly owned affiliates,
located in 21 countries, Standard & Poor's is an essential part of the world's
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in providing investors with the independent benchmarks they need to feel more
confident about their investment and financial decisions. For more
information, visit www.standardandpoors.com.
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