Only 3% of MBS End Up in Default

Less than 3% of the 13,419 U.S. structured finance securities issued over the last 10 years have defaulted, according to Moody's Investors Service.

In its first ever study of default and loss in the event of default for structured securities, Moody's said that its own structured finance ratings have provided investors with a powerful ordering of credit risk. The study looked at gross defaults, uncured defaults, material impairments and losses in the event of default.

The study examined 167 defaults among asset-backed securities, 80 among commercial mortgage-backed securities and 143 residential mortgage-backed securities.

"Gross payment defaults are the simplest measure of performance," said Moody's analyst Jian Hu. "However, in the structured finance market, defaults are often cured within a short period of time. Thus, as an alternative measure of performance, we also tracked the number of securities that defaulted and were not subsequently cured."

Of the 390 payment defaults during the study period, 94 were subsequently cured.

The study also looked at structured finance securities that have not defaulted yet, but appear almost certain to default in the future because of "material impairment" as reflected in rating levels that were "Ca" or "C."

Moody's also looked at loss severity. For the 84 defaulted securities that had zero balance by year-end 2002, the average loss severity rate given default was about 42%, Moody's said.

The ABS securities that were most frequently impaired were those backed by manufactured housing loans, franchise loans and home equity loans. These categories accounted for 82% of all ABS material impairments.

Corporate failures have been a major contributing factor, Moody's said.

The failures of Conseco, National Century Finance Enterprises and Heilig-Meyers resulted in a total of 46 material impairments, or 26% of the ABS total.

Most of the CMBS defaults have been caused by interest shortfalls, and the most recent defaults have been precipitated by appraisal reductions and special servicing fees.

Other causes of interest shortfalls in CMBS transactions include loan modification, unanticipated terrorism insurance expenses and legal expenses.

In the residential MBS sector, 75 of the 121 material impairments were related to one lender, Quality Mortgage, and 60 of these 75 defaulted from 1997 to 1999.

The study found that mortgage pools underlying these deals performed poorly and contained high percentages of investor properties, two-to-four family homes and loans originated with "inadequate documentation."

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