Moody's Upgrades, Corrects Ratings of Novastar’s Vintage RMBS

Moody's Investors Service has corrected and upgraded the ratings of three vintage securities backed by subprime mortgage loans that were issued by Novastar Mortgage Funding Trust from 2003 and 2004.

The NovaStar Mortgage Funding Trust, Series 2003-3 Cl. M-1, was upgraded to B1 (sf) following a June 8, 2012 upgrade to B3 (sf). Also, Series 2003-3 Cl. M-2 was upgraded to B3 (sf) from Caa1 (sf).

NovaStar’s Series 2004-1 Cl. M-6 was also upgraded to Caa3 (sf) after being downgraded to Ca (sf) on March 10, 2011.

Ratings reflect loan performance improvements and corrections related to the Structured Finance Workstation cash flow model Moody's used in rating these transactions, analysts wrote in a report, which affected “the amount of excess spread benefit to the bonds.”

Current evaluations are based on the “U.S. RMBS Surveillance Methodology” published in June 2013 that uses as primary assessment sources “central macroeconomic forecast and performance volatility as a result of servicer-related activity such as modifications.”

For example, analysts note, besides the unemployment rate, which dropped from 8.1% in August 2012 to 7.3% in August 2013 and should continue to decline, Moody's also expects further housing price increases in 2013.

But the performance of RMBS “continues to remain highly dependent on servicer activity” including workout tactics and servicing transfers, as well as regulatory changes.