September 18, 2008 / 8:22 PM / 11 years ago

Moody's raises loss projections for subprime RMBS

NEW YORK, Sept 18 (Reuters) - Moody’s Investors Service revised its expectations on lifetime losses higher for pools of securities backed by subprime residential mortgage loans on Thursday, citing growing delinquencies and elevated default rates.

Moody’s revised its cumulative loss projection for 2006 subprime loan pools up to 22 percent, compared with initial estimates in January of 14 percent to 18 percent, based on pool performance through July 2008 remittance reports and its updated assumptions on future outlook.

The credit ratings agency projected losses will hit an average of 29 percent for subprime pools issued during 2007’s first half, while loans originated during 2005’s second half will lose 11 percent of their original balances.

“Levels of delinquency and loss severity are proving to be much worse than in prior vintages and are demonstrating a persistent deterioration, especially as compared to our last loss projection update in January 2008,” said Jonathan Polansky, a managing director at Moody’s.

Moody’s also said it anticipates elevated default rates on the remaining non-delinquent borrowers for at least the next 18 months.

Its revised projections were based on the general credit quality of remaining subprime borrowers, current macroeconomic stress, including a worsening HPA environment and rising unemployment as well as a continued lack of refinancing opportunities.

While losses on these vintages have begun to materialize, the bulk of ultimate losses will be recognized over a longer period of time, it said. Cumulative losses are currently averaging 1.5 percent to 4.2 percent across the securities reviewed.

“Current losses are still low because loans remain relatively unseasoned in more recent vintages and partly because modifications may also be slowing down loss recognition,” Polansky said.

While additional negative rating actions are likely in wake of the revised loss projections on subprime RMBS, rating adjustments will vary based on a transaction’s portfolio composition, available credit enhancement, deal structure and servicer quality, said Moody’s.

The ratings agency said it will also evaluate the impact of revised residential mortgage loss rates on the fundamental ratings of financial firms with large residential mortgage portfolios. Increased loss expectations will be related to the companies’ capital bases and the speed at which they are expected to replenish capital through earnings.

Moody’s will also consider the ability of financial institutions to raise capital to compensate for the higher losses resulting from these revised estimates, it said.

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