Moody's Downgrades 120 Subprime RMBS Tranches

There's more bad news for subprime lending as Moody's Investors Service here has issued downgrades on 120 securities originated in the second half of 2005 and backed by subprime, first-lien mortgage loans.

The actions follow a review of the securities rated in the second half of 2005 and affect securities with an original face value of over $1.5 billion, representing 0.7% of the dollar volume and 4.1% of the securities rated by Moody's in the second half of 2005 that were backed by subprime, first-lien loans.

The actions reflect the higher-than-anticipated delinquency rates of first-lien subprime mortgage loans securitized in the second half of 2005.

"These loans were originated in an environment of aggressive underwriting, although not to the same degree as the subprime loans originated in 2006, answered Moody's.

"Aggressive underwriting combined with the prolonged slowdown in the housing market has caused significant loan performance deterioration and is the primary factor in these rating actions," the company said in a prepared statement. Moody's has noted a persistent negative trend in severe delinquencies for first-lien subprime mortgage loans securitized in late 2005 and 2006.

The vast majority of these downgrades impacted securities originally rated Baa or lower. In total, 54 securities originally rated Baa and 60 securities previously rated Ba were downgraded. Also, six tranches originally rated A were downgraded. No action was taken on securities rated Aaa or Aa.

In addition to the high rates of early delinquency predicating today's actions, Moody's notes that subprime mortgages originated in late 2005 and 2006 that are subject to interest rate reset are cause for credit concern. Subprime borrowers from previous vintages of such collateral avoided "payment shock" and potential default by refinancing.

However, with the recent pressure in home price appreciation and tightening of mortgage lending standards, such refinancing opportunities may be more limited. Moody's has noted that transactions issued in the second half of 2005 have begun to exhibit slower prepayment speeds as they near the two-year interest reset than did prior vintages.

Moody's is actively surveying loan servicers to evaluate the impact of potential increases in loan modification due to these upcoming resets.

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