S&P Downgrades 418 2nd-Lien RMBS Classes

Standard & Poor's Ratings Services has downgraded 418 classes of securities that are backed by U.S. closed-end second-lien mortgage collateral and were issued from January 2005 through January 2007.The rating actions, involving residential mortgage-backed securities with an original balance of approximately $3.8 billion, resolved 229 CreditWatch actions taken since Oct. 6, 2006, S&P reported. Over 100 of the downgraded classes had previously been downgraded, S&P said. The rating agency said it took the actions "because it believes that losses on U.S. RMBS backed by closed-end second-lien collateral will significantly exceed historical precedent and our original assumptions." The poor performance was attributed to various factors, including looser underwriting standards; pressure on home prices; speculative borrowing; risk layering (combining several risk elements for one borrower); very high combined loan-to-value ratios; financial pressure resulting from payment increases on first-lien mortgages; and questionable data quality. "Furthermore, in the past, when borrowers had difficulty managing their mortgage payments, they were able to refinance," S&P noted, something that tighter underwriting standards, higher interest rates, and home price erosion will make more difficult.