“Structural limitations in these transactions will typically prevent recoupment of interest shortfalls even if funds are available in subsequent periods. Missed interest payments on these tranches can typically only be made up from excess interest after the overcollateralization is built to a target amount. In these transactions, since overcollateralization is already below target due to poor performance, any future missed interest payments to these tranches are unlikely to be paid,” Moody’s said.
Five tranches from four RMBS transactions issued in 2002, 2003 and 2004 are affected by the downgrades, with four moving to lower speculative grade ratings from higher speculative grade ratings, and one moving to a lower investment grade rating from a higher one. Moody's caps the ratings of such tranches with weak interest shortfall reimbursement at an investment grade rating of A3 (sf) as long as they have not experienced any shortfall.
Equity One Mortgage Pass-Through Trust 2002-1’s class M-1 got downgraded to B1 (sf) from Ba3 (sf).
Equity One Mortgage Pass-Through Trust 2002-5’s class M-1 saw its rating slide to B1 (sf) from Ba3
(sf), Equity One Mortgage Pass-Through Trust 2004-3’s class M-1 fell in rating to B1 (sf) from Ba1 (sf). New Century Home Equity Loan Trust Series 2003-3’s class A-3 got downgraded to A3 (sf) from Aa3 (sf).
Interest shortfalls are among risks the National Association of Insurance Commissioners has been looking to account for as it makes additional changes to its residential/commercial mortgage-backed securities valuation method, according to a recent Barclays report.