Moody’s Hikes Expected Losses for Second Lien, Subprime and HELOC RMBS

Moody’s Investors Service revised its loss projections for 2005-2007 second lien, subprime and HELOC-based US residential mortgage backed securities (RMBS). Moody’s now expects cumulative losses to average approximately 25-55% of outstanding balance for non-subprime closed-end second (CES) pools, 70-85% for subprime CES pools and 40-50% for home equity line of credit (HELOC) pools. The revisions represent more than a 50% increase for expected cumulative losses on non-subprime CES, and nearly a 20% relative increase for subprime CES and HELOC pools. Following the increased loss expectations, Moody’s placed on review for downgrade 948 tranches of second lien RMBS — representing all vintages — with an original balance of $113bn and an outstanding balance of $35bn. Moody’s said second lien mortgage pools experienced elevated losses rates over the last few years as home values declined sharply. “The most important predictor of mortgage default in the past several years has been the degree to which borrowers have negative equity in their homes,” Moody’s said. “Borrowers with second liens, particularly those originated in more recent years, are almost universally in a negative equity position; most had combined loan to value ratios approaching 100% at origination and home prices have already dropped by nearly 30% since.” Write to Diana Golobay.