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Moody's Sees Bleak Outlook for Mortgage Pools

Weaker collateral, declining home values, higher mortgage rates and reduced credit availability to lenders have caused the performance of pools of loans backing U.S. residential mortgage-backed securities issued in 2006 and 2007 to continue to weaken throughout the first half of 2008, says Moody's Investors Service in a mid-year update.

Pools of both first and second lien loans issued in 2006 and 2007 and across the credit spectrum continue to suffer from difficult market conditions with delinquencies and losses continuing to rise in recent months.

First lien subprime and alt-A transactions have seen dramatically higher levels of delinquencies and losses in 2006- and 2007-vintage transactions relative to prior years.

The performance of mortgage pools in Jumbo transactions from 2006 and 2007 has also weakened, Moody's said. While the absolute level of delinquencies remains low in comparison to other RMBS segments, Jumbo delinquencies are building more quickly in recent months.

Moody's had previously identified some recent-vintage Jumbo transactions that were at risk of downgrade based upon the performance data available at the beginning of 2008. Given the continued performance deterioration in the Jumbo sector, Moody's said it is currently reviewing all Jumbo transactions that were originated in 2006 and 2007.

Second lien pools, a much smaller proportion of RMBS issuance in comparison to first liens, have also experienced extremely poor performance. Moody's expects 2005 vintage subprime closed-end second pools to lose 17% on average, 2006 vintage pools to lose 42% on average, and 2007 pools to lose 45% on average. However, given the wide range of deal characteristics and pool performance among transactions, Moody's expectations for any given transactions can vary significantly.

Prime CES pools have experienced far lower losses than have subprime ones, although, like in every other RMBS sector, 2006 and 2007 vintage delinquencies and losses have been increasing. On average, Moody's expects 2005 vintage prime CES pools to lose about 6% of their original balance, 2006 vintage pools to lose about 13%, and 2007 vintage pools to lose about 17%.

The performance of recent vintages of home equity line of credit pools has also weakened significantly. Moody's projects that pool losses on 2005 vintage HELOC transactions will average about 9%, while 2006 vintage transactions will on average lose around 24% and 2007 vintage around 26%. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/