Moody’s Downgrades $808 Million of Private Label Reverse Mortgage Bonds

Driven by continued weakness in the housing market, among other factors, Moody’s Investors Service downgraded the ratings of several bonds backed by private reverse mortgages.

The downgrade actions came from three mortgage deals and were driven primarily based on the loans concentrated in California, where house prices have declined more than 40% since 2006, Moody’s noted. Analysts expect those home prices to decline an additional 5% from current levels until 2012, after which a slow recovery will follow.

The secondary market impact is unlikely to be significant.

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“Downgrades are never good, but none of the bonds have had writedowns yet,” Michael McCully, partner at New View Advisors told RMD in an email. “Other rating agencies have previously downgraded these securities, so most of the market impact has probably already occurred.”

The six bonds from three reverse mortgage deals issued by Structured Assets Securitization Corporation (SASCO) from 2005 to 2007 mainly comprise first lien, non-recourse and uninsured reverse mortgages, Moody’s said in a report.

“All of the deals have a lot of overcollateralization,” McCully said. “A number of bonds (mostly mezzanine bonds) have paid off in their entirety. The rating agencies are basically re-calibrating the ratings by testing what happens if home prices fall another 30%.”

Moody’s noted that given the age profile of the borrowers, it expects a large percentage of maturities to take place over the next five years, while the housing market is still very weak. As a result, the ratings service said, cash flows to the bonds are expected to be impacted negatively.

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Written by Elizabeth Ecker

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