S&P mortgage bond revision likely means more downgrades
Standard & Poor's Ratings Services is revising its criteria for monitoring the performance of existing U.S. residential mortgage-backed securities.
The updated criteria is expected to bring more downgrades than upgrades, the credit ratings agency said.
However, S&P will use the updated criteria only on RMBS transactions backed by collateral originated before 2009, effective immediately.
"Over the next six months, we intend to review all in-scope transactions, which include first-lien prime, subprime, alternative-A (Alt-A), and negative amortization (Neg-am) collateral," S&P said in a statement.
"The events in the U.S. over the last few years have caused many in the mortgage market to re-think their approach to assessing RMBS," said Vandana Sharma, lead analytic manager for U.S. RMBS Ratings. "We have been monitoring developments in the market, changes in borrower behavior and collateral performance, and changes in the mortgage servicing sector closely. Based on what we've seen, there are significant differences in performance across sectors, driven by the underlying collateral and the timing of mortgage origination."
S&P expects the majority of the ratings (approximately 68%) to remain within three notches of the current rating. Approximately 2% of ratings will be raised four or more notches, and approximately 30% of ratings will be lowered by four or more notches.
Securities currently rated 'AAA' in transactions that have pro rata pay mechanisms and do not benefit from a credit enhancement floor or an equivalent functional mechanism will be rated no higher than 'AA+' to indicate the heightened event risk, S&P estimates.
Securities currently rated 'BB+' and lower, and particularly securities currently rated 'CC', are more likely to be raised because these criteria only apply the "standard" liquidation curve (and not the "front-end" liquidation curve) to ratings below 'BBB-'.
Approximately two-thirds of the upgrades involve movements to 'CCC' from 'CC'.
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