With the ABX Prime index stirring those willing to take risk on prime residential exposure, Moody’s came out with a report demonstrating why there likely will be a recurring offer on the index. In short:

Moody’s Investors Service has revised its loss projections for US prime
jumbo residential mortgage backed securities (RMBS) issued between 2005
and 2008. On average, Moody’s is now projecting cumulative
losses of 3.8% for 2005 securitizations, 8.0%
for 2006 securitizations, 10.9% for 2007 securitizations
and 12.3% for 2008 securitizations, reported as a
percentage of original balance. As a result of the revision,
Moody’s has now placed 4474 tranches of jumbo RMBS with an original
balance of $234 billion and current outstanding balance of $143
billion, on review for possible downgrade.

Moody’s is also aggressively hiking delinquent loan estimates in the near term.

To estimate losses, Moody’s first projected delinquencies
through the second half of 2010. Moody’s estimated that the
proportion of contractually current or 30-day delinquent loans
today that will become seriously delinquent by the second half of 2010
will be 3.7%, 7.0%, 8.4%,
and 9.4% for the 2005, 2006, 2007 and 2008 vintages,
respectively.

So much for no taxpayer losses on GSE exposure.

Full Moody’s text:

New York, December 17, 2009 — Moody’s Investors Service has revised its loss projections for US prime
jumbo residential mortgage backed securities (RMBS) issued between 2005
and 2008. On average, Moody’s is now projecting cumulative
losses of 3.8% for 2005 securitizations, 8.0%
for 2006 securitizations, 10.9% for 2007 securitizations
and 12.3% for 2008 securitizations, reported as a
percentage of original balance. As a result of the revision,
Moody’s has now placed 4474 tranches of jumbo RMBS with an original
balance of $234 billion and current outstanding balance of $143
billion, on review for possible downgrade.

 

Moody’s has already taken widespread rating actions on deals backed by
jumbo collateral from the 2005-2008 vintages from March through
July of this year. The updated loss projections will have the greatest
impact on senior securities issued in 2005.

 

On October 29th, Moody’s announced that it would update certain
assumptions underlying loss projections for each of the major RMBS sectors.
The rapidly deteriorating performance of jumbo pools in conjunction with
macroeconomic conditions that remain under duress prompted today’s
announcement. Over the past nine months serious delinquencies (loans
60 or more days delinquent, including loans in foreclosure and homes
that are held for sale) on jumbo mortgage pools backing 2005 to 2008 securitizations
have increased markedly. Since March, serious delinquencies
for the 2005, 2006, 2007 and 2008 vintages have increased
to 3.2% from 2.1%, 6.0%
from 3.8%, 7.6% from 4.8%
and 7.8% from 4.6% respectively (reported
as a percentage of original pool balance).

 

Even though the Case-Shiller index in recent months has reported
very modest home price gains, Moody’s believes the overhang of impending
foreclosures will impact home prices negatively in the coming months.
Moody’s Economy.com (MEDC) expects home prices to decline
an additional 9% to reach a peak-to-trough decline
of approximately 37%. Adding to borrowers’ financial pressure,
unemployment is now projected to peak at around 10.6% from
previous projections of 9.8% from the first quarter of this
year. Both measures are expected to reach their peaks sometime
in the second half of 2010, after which recovery is expected to
be slow.

 

Estimation of Losses

 

To estimate losses, Moody’s first projected delinquencies
through the second half of 2010. Moody’s estimated that the
proportion of contractually current or 30-day delinquent loans
today that will become seriously delinquent by the second half of 2010
will be 3.7%, 7.0%, 8.4%,
and 9.4% for the 2005, 2006, 2007 and 2008 vintages,
respectively.

 

Growth in new delinquency levels beyond the second half of 2010 is expected
to decline with improving economic and housing conditions. To estimate
delinquencies beyond 2010, Moody’s decelerated the new delinquency
rates by 15% for 2011, 25% for 2012, 35%
for 2013 and 40% for 2014 and beyond. The deceleration rates
reflect home price, unemployment and foreclosure projections from
MEDC beyond 2010.

 

To calculate the default rate on the projected delinquencies, Moody’s
assumed an average roll rate (probability of transition from delinquency
into default) of 88%. The loss on the loan upon default
(severity of loss) is expected to be around 50% on average —
this is higher than historical severities as home prices are expected
to depreciate further.

 

In addition, the government’s effort to curb loan defaults
and foreclosures through loan modification has failed to gain traction;
prompting Moody’s to reduce the average modification benefit to
projected losses across vintages from 15% in March to less than
5% going forward.

 

Moody’s will release a special report in the coming weeks that will
detail its methodology for determining revised loss projections for jumbo
transactions issued from 2005 to 2008.

 

Rating Actions

 

To assess the rating implications of the updated loss levels on jumbo
RMBS, Moody’s will analyze each transaction through a variety
of scenarios in the Structured Finance Workstation (SFW), the cash
flow engine provided by Moody’s Wall Street Analytics. The
scenarios incorporate ninety-six different combinations of loss
levels, loss timing (CDR)and prepayment (CPR) curves.

 

On senior securities, the extent of rating actions due to the revised
loss projections will vary by vintage. Currently, over 70%
of the senior securities issued in 2005 maintain investment grade ratings.
Moody’s anticipates a majority of these ratings to migrate to Ba/B
ratings. However, over 70% of the senior securities
issued in 2006 and 2007 are already rated below investment grade and consequently
are expected to experience smaller rating migrations. In general,
bonds that have a short estimated life or are supported by other senior
securities will more likely see smaller rating transitions. The
rated subordinated tranches from 2005 to 2008 vintages have already been
downgraded to Ca or C.

 

Moody’s rates securities B2 or higher if they are likely to be paid off
under an expected scenario. If a security is likely to take a loss
under an expected scenario, it will typically be rated B3 or lower.
Securities with expected recoveries of 65% to 95% are rated
in the Caa range. Securities with expected recoveries of 35%
to 65% are rated Ca, while securities with expected recoveries
below 35% are rated C.

 

Other methodologies and factors that may have been considered in the process
of rating this issue can also be found at www.moodys.com
in the Rating Methodologies subdirectory.

 

by Tyler Durden via zero hedge
http://www.zerohedge.com/article/moodys-puts-143-billion-jumbo-rmbs-downgrade-review