The downward slide in the US RMBS market appears to be continuing, with Standard and Poor's announcement today that it will downgrade 418 closed-end second lien RMBS classes on top of the first-lien downgrades already announced. S&P said that the announced downgrades represented an original total balance of approximately $3.8 billion, which represented 6.1 percent of the approximately $62 billion in U.S. RMBS backed by closed-end second-lien collateral rated from the beginning of January 2005 through the end of January 2007. In my opinion, however, the interesting part is here:
... It is important to note that 127 of the classes affected by today's rating actions have been previously downgraded. In fact, prior to today, Standard & Poor's had already lowered its ratings on 197 classes of U.S. RMBS backed by closed-end second-lien collateral issued between the beginning of January 2005 and the end of December 2006. Some of the classes affected by today's rating actions have been downgraded multiple times for a total of 275 previous downgrade actions.
I'd blogged on the initial second lien downgrades in late June, and HW readers should note that "closed-end second lien" can usually be taken to mean "subprime." It's interesting to see these second-lien downgrades continue, however....you'll usually see second-lien downgrades precede a downgrade of first-lien collateral, which is exactly what took place with the intial round of downgrades. Seeing even more second-lien downgrades suggests that performance is even worse than whatever the assessment was in June. In terms of explaining the downgrades, S&P had the standard "losses have exceeded our expectations" language, but also had this interesting addition:
These U.S. RMBS transactions backed by closed-end second-lien collateral have been experiencing high early payment defaults that have not abated. Originally, we believed that these losses might abate and that the transactions would revert to delinquency and default patterns that are closer to historic norms. However, these transactions have now reached a sufficient level of seasoning for us to conclude that, based on the factors above, they will evidence delinquency and default loss trends indicative of poor future performance that will continue to exceed historic precedent and our original ratings assumptions.
It looks like performance has been so bad on these loans that even the intially-adjusted performance expectations were off the mark, forcing a complete overhaul of the survelliance methods used to track securities in this class. The full press release covers the new survelliance criteria in detail, but it essentially amounts to tacking on additional loss assumptions earlier in the delinquency process -- a move that drove the block of downgrades that were announced.