Home Equity Dominates Downgrades in the First Quarter

Downgrades of asset-backed securities tracked by Moody's Investors Service continue to be dominated by the home-equity sector, the rating agency said.

And not only did the home-equity sector see a lot of downgrades in the first quarter, it also saw fewer upgrades than were recorded in the home-equity sector during the fourth quarter of 2006.

All told, Moody's downgraded 95 ABS classes in the first quarter, affecting $2.6 billion in ABS securities. Seventy-nine of the downgrades involved home-equity-backed securities, marking it the ninth consecutive quarter in which the home-equity sector has been the most frequently downgraded asset class.

Moody's said that poor collateral performance, inadequate credit support as delinquencies rose, and reduced excess spread due to increases in LIBOR between mid-2004 and mid-2006 were among the factors contributing to home-equity deal downgrades. In addition, pool losses being weighted toward the "tail ends of transactions" also contributed to thin credit support on deals.

Moody's noted that 25 securities backed by closed-end, second-lien mortgage loans were downgraded during the first quarter, and 17 of those deals were created in 2006.

"These actions were the result of the poor performance of the underlying assets and reflected the loosening of mortgage underwriting standards that has occurred over the last few years in the subprime markets as well as the significant layering of risk," Moody's said in a report.

Moody's said that pools backed by closed-end, second-lien loans in years prior to 2006 were more likely to be made to borrowers who provided full documentation of income and assets, rather than stated income or no documentation.

And the downgrades may not come to an end anytime soon. At the end of the first quarter, Moody's had 49 tranches from 26 closed-end, second-lien deals on review for possible downgrades. In total, Moody's had 227 home-equity-backed securities on review for downgrade.

Moody's said that the home-equity sector is likely to continue being "the most active sector" for rating actions. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com