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Moody's May Downgrade FHA, VA RMBS

Increased default rates among certain Federal Housing Administration-insured and Veterans Administration-guaranteed residential mortgages in recent months may lead to negative ratings actions. Moody's Investors Service placed eight tranches of FHA/VA residential mortgage-backed securities (RMBS) on review for potential ratings downgrades. Cumulative losses on pools issued from 02 through 07 rose to 0.61% in March 09 from 0.48% in March 08. The ratings agency expects continued increases in loss levels as long as the general level of remaining delinquencies remains high. "Since FHA loans are typically originated with high loan-to-value ratios -- typically in excess of 90% -- a majority of the borrowers are likely to have negative equity in their homes given recent home price declines," officials at Moody's say in a statement today. "As has been true for all RMBS sectors, this has increased the risk of future default among currently non-delinquent borrowers." Although losses related to FHA-insured mortgages are relatively low due to the nature of the insurance program, only 66% of eligible foreclosure costs are paid under the insurance program, leaving bondholders to absorb additional losses, according to Moody's. Loss coverage is generally limited to 25% to 50% of the unpaid loan balance under VA guarantees, the ratings agency notes. These risks, combined with the rising delinquencies among the relevant RMBS, were enough to make Moody's place the tranches on review for downgrade. Write to Diana Golobay. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.

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