Moody's Investors Service downgraded the ratings of 49 tranches and confirmed the ratings of four tranches from 15 RMBS deals that are backed by prime jumbo loans that were issued by Wells Fargo MBS from 2005 to 2008.
The collateral backing these offerings comprise mostly first-lien, ARM, prime Jumbo residential mortgage loans. The rating agency's actions were caused by the rapidly deteriorating macroeconomic conditions as well as jumbo pool performance.
These actions reflect Moody's updated loss expectations on prime Jumbo pools issued from 2005 to 2008.
To assess the rating implications of the updated loss levels on prime Jumbo RMBS, the rating agency ran each individual pool through different scenarios in the firm's Structured Finance Workstation® (SFW), which is the cash flow model developed by Moody's Wall Street Analytics.
This individual pool level analysis looks at performance variances across the different pools
as well as the deal's structural features that include priorities of payment distribution among the different tranches, average life of the tranches, current balances of the tranches and future cash flows under expected and stressed scenarios.
The scenarios include ninety-six different combinations made up of six loss levels, four loss timing curves and four prepayment curves. The volatility in losses experienced by a tranche as a result of small increments in losses on the underlying mortgage pool is taken into consideration when assigning the ratings.
The approach, which was outlined in the agency's publication called Jumbo RMBS Loss Projection Update: January 2010, is adjusted to estimate losses on pools with a small number of loans.
To project losses on pools with less than 100 loans, Moody's first projects a "baseline" average rate of new delinquencies for the pool that is dependent on the vintage of loan origination —3.5%, 6.5% and 7.5% for the 2005, 2006 and 2007 vintage respectively. This baseline rate is more than the average rate of new delinquencies for the vintage to account for the volatile nature of small pools. Even though only a few loans in a small pool become delinquent, there could be a big rise in the overall pool delinquency level because of the concentration risk.
When the baseline rate is set, further adjustments are made based on the number of loans that are still in the pool as well as the level of current delinquencies in the pool. The fewer the number of loans that are still in the pool, the higher the volatility and hence the stress applied.
Once the loan count in a pool falls below 75, the rate of delinquency is increased by 1% for every loan less than 75. For example, for a pool with 74 loans from the 2005 vintage, the adjusted rate of new delinquencies would be 3.535%, Moody's said. If the current delinquency level in a small pool is low, future delinquencies are expected to reflect this trend as well.
To account for that, the rate calculated above is multiplied by a factor ranging from 0.2 to 1.8 for current delinquencies ranging from less than 2.5% to greater than 30%, respectively, the rating agency said.
Delinquencies for subsequent years and ultimate expected losses are projected using the approach described in the methodology publication.
