RMBS Market Faces Minimal Exposure to Katrina Damage

Standard & Poor's executives Ernestine Warner and Robert Pollsen authored a report, "For U.S. RMBS, Minimal Exposure Provides Shelter From Katrina." This viewpoint is an excerpt from the full report.

Despite the devastating impact of Hurricane Katrina on thousands of residents living along the Gulf Coast, the effect on residential mortgage-backed securities rated by Standard & Poor's remains benign. Given the relatively limited exposure of Standard & Poor's RMBS portfolio to the affected areas, overall ratings performance has remained strong during the months since Katrina and last year's other severe storms.

Immediately following Katrina, Standard & Poor's identified just over 3,600 transactions that had loans in the affected ZIP codes throughout Alabama, Florida, Louisiana and Mississippi. Since that time, our Katrina-specific monitoring has focused on transactions that initially had at least 1% of their loans in FEMA-designated federal disaster areas. At the time of our initial report in September 2005, we identified approximately 400 transactions that originally had more than 1% of loans in the affected areas. Throughout our monitoring, our analytical focus has been on delinquencies and loss performance, credit-enhancement structure, and actual and projected credit support. While we have seen increased delinquencies in many of the pools, this upward trend has not yet translated into losses in the individual mortgage pools. As of April 2006, we have taken no negative rating actions on the 400 transactions determined to have increased risk due to property concentrations in the affected areas.

Since our initial report last September, 478 of the potentially affected transactions have paid in full. To assess the number of outstanding transactions issued between January 2000 and September 2005 with exposure to Katrina-affected areas, we ran an updated query of the original files using Standard & Poor's Trends database, which identified 3,151 transactions. Of these 3,151 transactions, many had loans in Florida, but none that were in FEMA-designated disaster areas. As such, this review does not cover those transactions.

Loans from the remaining three states continue to appear in a significant number of the transactions, but they generally represent less than 1% of the original cutoff date principal balances.

On average, transactions with loans from disaster areas in Alabama had only a 0.08% concentration of loans from the affected ZIP codes. Additionally, only 10 had more than a 1% concentration. On average, transactions with loans from disaster areas in Mississippi had only a 0.16% concentration from the affected ZIP codes, and only 45 transactions had more than a 1% concentration. Transactions with loans in the FEMA-designated areas from Louisiana, on average, had a 0.43% concentration from the affected ZIP codes, and 324 transactions had more than a 1% concentration.

As of month-end April 2006, the 10 transactions with at least 1% initial pool composition of loans from the affected areas in Alabama continue to perform well, with no significant delinquency deterioration in any of the pools.

Transactions with more than a 1% exposure to affected collateral in Mississippi, with few exceptions, continue to perform well. At this time, lackluster performance of any affected transaction has not been directly linked to properties affected by the hurricane.

Transactions with exposure to the affected ZIP codes in Louisiana are collateralized by many residential mortgage collateral types. Subprime is the most common (201), followed by scratch-and-dent (56), high combined loan-to-value (35), alt-A (29) and prime jumbo (19). Most of these transactions are performing very well. Delinquencies and cumulative losses remain very much in line with the averages for the related collateral types. Credit enhancement at the lowest rating level in each transaction is substantial, and it exceeds the severely delinquent loan percentage in many of the pools. Cumulative losses are also in line with averages for the related collateral types, and we have noted no unusual increases for these transactions.

Due to the sheer devastation caused by Hurricane Katrina, we anticipate a slight rise in delinquencies among the transactions collateralized by loans in the affected ZIP codes. The increase will be due to mortgagors dealing with personal tragedy, the general decimation of local infrastructures, and the loss of employment. Catastrophe experts estimate that it will be many months before residents in the hardest-hit areas can return home, if ever. Servicers are expected to continue advancing for delinquent interest and principal until the advances are deemed non-recoverable.

Given the huge impact of last year's hurricanes and the long road to recovery ahead, Standard & Poor's will continue to keep the market informed of any new developments with regard to rated RMBS transactions as the issue evolves.

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