April 29, 2008 / 10:20 PM / in 10 years

S&P cuts $41 bln of mostly higher-rated Alt-A deals

NEW YORK, April 29 (Reuters) - Standard & Poor’s cut the ratings on about $41 billion of mostly higher-rated U.S. residential mortgage-backed securities backed by so-called Alt-A loans on Tuesday.

The rating agency’s action affected 2,183 RMBS classes from 334 Alt-A deals originated during 2006. S&P cut $5.86 billion of “AAA”-rated debt, while keeping $58.16 billion under review for possible downgrade.

S&P said it will assess whether further rating actions are warranted on the “AAA” securities placed under review by analyzing available credit support to projected losses during the timeframe issues remain outstanding.

The Alt-A segment spans a spectrum of credit quality and performance, ranging from near-prime to near-subprime.

While credit scores of borrowers are generally better than subprime, certain attributes are similar, such as the inclusion of stated income loans, reduced-documentation loans and second-lien mortgages, creating a layering of risks similar to subprime securities.

The rating agency also cut $4.65 billion of “AA+” Alt-A RMBS ratings, $8.09 billion of “AA” issues, $2.72 billion of “A+”debt and $1.46 billion of “A-minus” issues.

“The downgrades and CreditWatch placements reflect our opinion that projected credit support for the affected classes is insufficient to maintain the ratings at their previous levels, given our current projected losses,” said S&P in a release on Tuesday.

The rating agency said it was assuming total loan loss of 34 percent for Alt-A RMBS transactions backed by fixed-rate and long-reset hybrid collateral, which are loans with fixed-rate periods of at least five years, issued in 2006.

“Due to current market conditions, we are assuming that it will take approximately 15 months to liquidate loans in foreclosure and approximately eight months to liquidate loans categorized as real estate owned (REO),” it said.

S&P estimated a loss severity of 35 percent on deals backed by mortgage loans with a negative amortization feature while assuming a loss severity of 35 percent for transactions secured by adjustable-rate loans and short-reset hybrid loans with fixed-rate periods of less than five years.

The rating agency said it also affirmed 144 classes of Alt-A RMBS securities and removed them from CreditWatch negative.

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