Moody's Sees High ARM Losses
New York-Moody's Investors Service has updated its loss expectations on residential mortgage-backed securities issued in 2006 and 2007, saying that it now expects cumulative losses of 27% for the 2006 vintage and 30% for the 2007 vintage.
As a result, Moody's expects to make additional downgrades to many mortgage-backed securities backed by option-ARM loans. Average losses will generally be lower for transactions done early in 2006 than for those issued later in the year.
As a result of the new assumption, Moody's is reviewing ratings on some $240 billion of rated MBS that include option-ARM loans. The review includes deals going back to 2004 and will likely result in further downgrades to subordinate tranches, Moody's said.
Moody's analysis showed that about 70% of option-ARM borrowers make the minimum payment allowed under their loan, which often puts them in a negative amortization position. Moody's expects about $30 billion of option ARMs to "recast" in 2009, meaning borrowers will see their payments increase sharply because they have to make fully amortizing payments.