Weak Performance Offsets Countrywide Settlement

Increasing pool losses and riding shares of delinquent loans muted the positive credit effects of recent settlements, according to a release sent by Moody’s analysts on Tuesday.

The influx of $7.35 billion of settlement proceeds to deals involving outstanding Countrywide residential mortgage-backed securities (RMBS) was not large enough to significantly affect the transactions’ credit profile going forward, according to the statement.

“The $7.35 billion of settlement proceeds distributed thus far to the “settling trusts” we rate accounted for only 9.6 percent of our current projection of those trusts’ lifetime losses, and the majority of the transactions have delinquency pipelines greater than 10 percent of current balance,” Moody’s said.

Distributions were credit positive for only a limited number of bonds, with 7 percent of bonds recording more than a 10 percent increase in credit enhancement with 19 percent of bonds upgraded.

Bond from deals with low settlement shares still benefited because of waterfall features, while the credit profile of bonds from deals with large settlement shares but weak pool performance remain unchanged.

“Ultimately, the underlying pool performance, in conjunction with transaction specific waterfall features, and not just the settlement amount factored into the impact of the recoveries,” Moody’s said.

On average, the distribution of $7.35 billion from $8.5 billion of the Countrywide settlement funds to Countrywide RMBS bonds Moody’s rates covered 9.5 percent of the lifetime net loss they project on Alt-A, 9.9 percent of subprime, 9.9 percent of prime jumbo and only 9.5 percent of option ARM product lines.

“In addition, the majority of transactions have delinquency pipelines greater than 10 percent,” Moody’s said.

The distributions were credit positive for a small number of bonds, as it resulted in partial recoveries of bond losses and minimal to-no write-ups of subordinated bonds that had sustained losses. Of bonds in the major asset classes, 68 percent displayed no positive growth in credit enhancement and 7 percent of bonds displayed an increase in credit enhancement of more than 10 percent. As nearly 61 percent of Countrywide deals had no subordinate bonds prior to the settlement and only 14 deals had subordinate tranches written up from zero, the recoveries, even those as large as 30 percent of the May pool balance, did not offset the depletion of credit enhancement and or losses already incurred on these bonds.