Moody's takes actions on $149.3M of US Scratch and Dent RMBS
Global rating agency Moody's has downgraded the rating of nine tranches and affirmed the rating of 15 tranches from six transactions, backed by Scratch and Dent loans.
The actions are a result of recent performance review of these deals and reflect Moody's updated loss expectations on these pools. Today's rating actions constitute of a number of downgrades and affirmations. The downgrades are primarily due to the weak interest shortfall reimbursement mechanism on the bonds.
The tranches downgraded to A3 do not have interest shortfalls but in the event of an interest shortfall, structural limitations in the transactions will prevent recoupment of interest shortfalls even if funds are available in subsequent periods.
Missed interest payments on these mezzanine tranches can only be made up from excess interest and after the overcollateralization is built to a target amount. In these transactions since overcollateralization is already below target due to poor performance, any missed interest payments to mezzanine tranches are unlikely to be paid. Moody's caps the ratings of such tranches with weak interest shortfall reimbursement at A3 as long as they have not experienced any shortfall.
Class M-1 in Ameriquest Mortgage Securities Inc., Quest Trust 2003-X4; and Class M-2 in Ameriquest Mortgage Securities Inc., Quest Trust 2004-X2; Ameriquest Mortgage Securities Inc., Quest Trust 2004-X3; and Ameriquest Mortgage Securities Inc., Quest Trust 2005-X1, were downgraded to B1. These tranches have large outstanding interest shortfalls and a weak interest shortfall reimbursement mechanism.
For the tranches with large outstanding interest shortfalls, Moody's applies "Moody's Approach to Rating Structured Finance Securities in Default" published in November 2009.
This rating action takes into account only credit-related interest shortfall risks.Other factors used in these ratings are described in "Moody's Approach to Rating Structured Finance Securities in Default" published in Nov 2009.