S&P Downgrades, Puts on Watch Negative 133 RMBS Ratings

Not to be outdone by last week’s ratings action at Moody’s on various subprime RMBS, Standard and Poor’s this week unleashed it’s own mass ratings cut, affecting 133 subordinate classes from 2005 and 2006 vintage RMBS deals. The cuts impacted both subprime and closed-end second-lien deals (FWIW, second liens such as this are otherwise known as “subprime loans”). From the S&P press release, a summary of the downgrades:

Standard & Poor’s Ratings Services today took various rating actions on 133 subordinate classes from 62 different transactions from 23 different issuers. We downgraded 45 classes backed by closed-end second-lien collateral … [affecting] a total of 34 closed-end second-lien deals from 12 different issuers. Our rating actions also affected 42 classes backed by subprime collateral from 30 different transactions from 15 different issuers. We … downgraded 11 classes [of the 42] …

A slew of subordinate classes from second-lien and subprime deals were also put on Credit Watch negative, as would be expected. And in reading the full S&P press release, I couldn’t help but notice that severe delinquency rates in some of these loan pools are just astronomical. The highest among the downgraded second-lien transactions can be found in the New Century Home Equity Loan Trust 2006-S1, in which severe delinquencies represent 18 percent of the pool balance — for those keeping score at home, severe delinquencies are mortgages more than 90 days in arrears, in foreclosure, or in REO. And among the downgraded subprime deals, the Argent Securities Trust 2006-W5 is sporting a severe delinquency rate of over 17 percent of the current pool balance. According to S&P, the 2005 and 2006 vintages are “showing weakness because of origination issues: aggressive residential mortgage loan underwriting, first-time homebuyer programs, piggyback second-lien mortgages, hybrid ARMs entering their reset periods, and the concentration of affordability loans.” If that’s the root cause of the bad performance so far, particularly in the 2006 vintage, things will likely get much worse before they get better — there are plenty of borrowers just now entering the delinquent phase, with more behind them staring down the barrel of a payment reset.

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