Subprime RMBS Losses Smaller than Underlying Mortgages

U.S. subprime residential mortgage-backed securities, or RMBS, originally rated “AAA” and issued from mid-2005 through mid-2007, will see much smaller write-downs than the $180 billion projected for the underlying mortgages, said Standard & Poor’s RatingsXpress Credit Research.

As a result, while RMBS investors will see significant losses — an estimated $85 billion – that is far less than the losses generated by the underlying collateral, S&P said, mainly due to the way RMBS are structured.

We expect realized collateral losses in U.S. subprime RMBS transactions to accelerate as the current residential inventory is liquidated. As a result of significant collateral losses, we project that many subprime RMBS certificates will be written down. Depending on where a class is in a transaction’s capital structure, it may be written down by as little as 1% or by as much as 100%.

In S&P’s analysis, the ratings agency forecasts that subprime mortgage delinquencies will continue to climb and that by the end of 2009, home prices will have fallen nearly 30 percent from the July 2006 peak.

Home prices are down about 20 percent over the past two years, according to the S & P Case-Shiller Home Price Index, with declines accelerating over the summer.

For details, see “U.S. Subprime RMBS Losses For Original ‘AAA’ Bonds May Be Significantly Less Than Market Projections.”