New approach leads Moody's to downgrade nearly $1.7B of Chase RMBS
Moody's Investors Service downgraded most of $1.7 billion of residential mortgage-backed securities due to the continued deterioration in the performance of the underlying subprime mortgage pools backing the transactions. The rating agency lowered ratings on 131 tranches of mortgages securitized and issued by JPMorgan Chase (JPM) prior to 2005. Analysts also confirmed the ratings of five tranches of the securities from 16 subprime deals issued by Chase between 2002 and 2004. "Although most of these pools have paid down significantly, the remaining loans are affected by the housing and macroeconomic conditions that remain under duress," Moody's analysts said. In January, Moody's adjusted its criteria for RMBS issued before 2005. Analysts said that new approach means downgrades for the Chase mortgage pools with small numbers of loans. "Even if a few loans in a small pool become delinquent, there could be a large increase in the overall pool delinquency level due to the concentration risk," analysts said. In the cases where the RMBS is originated and securitized prior to 2005 and contains a small pool of loans, Moody's estimates a baseline average rate of new delinquencies of 11%. That assumption is then adjusted further once the pool has fewer than 75 loans, as the rate of delinquency is increased by 1% for every loan less than that threshold. "The fewer the number of loans remaining in the pool, the higher the volatility in performance," Moody's said. Moody's already lowered ratings on billions of other RMBS issued before 2005, as well. One example was the 94 tranches of RMBS from 22 subprime deals worth $1.3 billion issued by Structured Asset Investment Loan Trust that was downgraded. Other downgrades include $440 million of subprime RMBS issued by Citigroup's (C) Citifinancial unit and $347 million of subprime-mortgage bonds issued by Citigroup itself. These RMBS were issued in transactions in 2003 and 2004. Some $310 million of subprime RMBS issued by IndyMac was also downgraded. Still, the RMBS portfolios of these firms don't appear to be taking the hit JPMorgan Chase is taking on its subprime RMBS. Analysts said weakness persists in the housing market and unemployment levels remain high. Therefore Moody's expects another 5% decline in housing prices in 2011 with some stabilization later in the year. Back in November, Fitch Ratings said the robo-signing scandal considerably hurt servicing of RMBS, and analysts lowered the outlook for the entire $1.78 trillion sector to negative from stable. Write to Jason Philyaw.