Second lien mortgage versus home equity

S&P Releases Second-Quarter Trends for RMBS

Business Editors

NEW YORK--(BUSINESS WIRE)--Aug. 4, 2003

Standard & Poor's--Standard & Poor's Ratings Services has released its quarterly focus on trends relating to average credit scores and credit enhancement levels in the residential mortgage-backed securities (RMBS) market. In addition to prime, subprime, high combined loan-to-value (CLTV), and home equity line of credit (HELOC) transactions, this report contains two sections introduced in the first-quarter 2001 report: alternative A (Alt A) and closed-end seconds (CES) less-than-100%-CLTV issuers. Each section is designed to provide insight for investors regarding the relative risk assessments among these originators/issuers.

According to the report, "Trends in U.S. Residential Mortgage Products: Second-Quarter 2003 LTV Ratios, FICO Scores, and Credit Support Levels," Standard & Poor's rated 87 prime RMBS transactions in second-quarter 2003, an increase of five deals from the 82 deals rated in the first quarter. The average FICO score for these pools was 730.98, a decrease of approximately 1.75 from the first-quarter average of 732.74.

The article also notes that the appetite of prime borrowers for hybrid adjustable-rate loans (adjustable-rate loans that have initial fixed-rate periods of three to 10 years) along with the appeal of traditional ARM loans to take further advantage of the current interest-rate environment is evidenced by the continued strength of their securitizations. In the second quarter, Standard & Poor's rated 26 such transactions. This trend is expected to continue throughout 2003.

In the Alt-A category, the second-quarter FICO scores for the 30-year, fixed-rate pools ranged from a high of 725 to a low of about 675 versus the first quarter's high of 737 and low of 675. The LTV ratios among these pools ranged from a low of about 68% to a high of approximately 80%. 'AAA' credit enhancement levels for these pools ranged from 3.25% to 9.50%.

Standard & Poor's rated 55 subprime mortgage transactions totaling approximately $43.80 billion during second-quarter 2003 compared with 37 transactions worth more than $31.80 billion in first-quarter 2003. The average FICO score for the fixed-rate mortgage pools of the subprime issuers remained steady at 629 in second-quarter 2003.

Additionally, the use of deep mortgage insurance for subprime deals increased, as 41% of the issuers in second-quarter 2003 used this as a form of credit enhancement compared to 37% in the first quarter.

The second-lien high combined loan-to-value product's (125% HCLTV) second-quarter 2003 securitization volume of $250 million is down 67% from second-quarter 2002's $758 million, the report states. In second-quarter 2003, RFC, the mainstay issuer for the 125% HCLTV market, securitized one transaction totaling $250 million, while in second-quarter 2002 RFC securitized $375 million (comprising one transaction)-a 33% decrease. According to the article, the low-interest-rate environment and the onset of predatory-lending laws from various states has stunted the growth of the 125% HCLTV securitization market.

HELOC second-quarter 2003 securitization volume of $2.76 billion (comprising six transactions) increased by 64% from second-quarter 2002's volume of $1.68 billion (comprising three transactions). All of the transactions in the second quarter used bond insurance as their form of credit enhancement.

Finally, the CES less-than-100%-CLTV second-quarter 2003 securitization volume of $2.78 billion increased by 19% from second-quarter 2002's volume of $2.33 billion. The slight increase in volume was due to two first-time issuers, Terwin Capital LLC and Compass Bank, entering the CES securitization marketplace.

The article also notes that the two most popular structures for closed-end, second-lien products currently are the shifting interest senior subordinate, excess spread and overcollateralization structure, and the hybrid structure combining senior subordination features while using a pool insurance policy.

"Trends in Residential Mortgage Products: Second-Quarter 2003 LTV Ratios, FICO Scores and Credit-Support Levels" is available on RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. It is also available on Standard & Poor's Web site at www.standardandpoors.com. Click on "Credit Ratings", then under "Browse by Business Line" click "Structured Finance", and under "Commentary & News", scroll down to the August 1 article.

Standard & Poor's is a leader in providing highly valued financial data, analytical research and investment and credit opinions to the global capital markets. With more than 5,000 employees located in 19 countries, Standard & Poor's is an integral part of the world's financial architecture. Additional information is available at www.standardandpoors.com.