The rating changes affect $455.5 million of low-end investment grade and speculative grade prime RMBS backed by first lien, fixed- and adjustable-rate jumbo loans.
Legacy RMBS from before the problematic 2005-2007 years remain outstanding in the market and have a particular surveillance methodology applied to them, adjusted for Moody’s current view of loan modifications and small pool volatility.
While these vintages are viewed in some respects as having some relative positives given that they pre-date the 2005-2007 years, historically they tend to be subject to a certain amount of adverse selection as they age.
Moody’s said the downgrades in these deals reflect deteriorating performance and structural features that have resulted in higher-than-expected losses. The upgrades conversely reflect some relative improvement in collateral performance and/or rapid buildup in credit enhancement due to high prepayments. Both are typical as deals age.
Among the less predictable variables as legacy RMBS age are changes in government loan programs and servicers’ modification policies that can affect performance, something that will be continue to be consideration in 2013.