In This Issue: Standard & Poor's Weighs In On The U.S. Subprime Mortgage Market: The consequences of the U.S. housing market's excesses, a topic of speculation for the past couple of years, finally have begun to surface. It will take many months for the forces set in motion by the subprime decline to run their course, and for the ultimate impact to become obvious. Thus, today's prediction could become tomorrow's missed estimate.A Comparison Of 2000 And 2006 Subprime RMBS Vintage Sheds Light On Expected Performance: While subprime mortgages issued in 2000 have the distinction of being the worst-performing residential loans in recent memory, a good deal of speculation in the marketplace suggests that the 2006 vintage will soon take over this unenviable position. Based on Standard & Poor's analysis, our current loss expectation for the 2006 subprime vintage is 5.25% to 7.75%. RMBS Trends: U.S. Subprime Market Continues Correction As Issuers Strengthen Underwriting Standards: The appetite for U.S. subprime loans from the secondary market has exceeded demand in recent quarters, encouraging an erosion in underwriting standards. Early payment defaults and increased early delinquencies in the 2006 vintage have been key factors in evaluating current subprime performance. Standard & Poor's sought evidence that corroborates industry claims of tightened underwriting standards and we conclude that while there is evidence of improvement with regard to documentation, other results remain mixed. Subprime Loan Servicers Step Up Loss Mitigation Efforts To Avoid Foreclosures: Amid the constant drumbeat of bad news in the residential subprime market, mortgage servicers are gearing up for some tough times ahead. The combination of souring affordability products and slowing property appreciation has caused what many in the industry are calling a perfect storm, which is swelling in the form of increased defaults and foreclosures, leaving many unprepared borrowers without a viable life preserver. Will Subprime Woes Spread To The Wider Mortgage Market?: As defaults continue to rise in the subprime mortgage market, Standard & Poor's has responded with downgrades of two of the largest specialty finance subprime lenders. The rising tide of subprime defaults is raising many questions not only about the subprime market, but also about the ramifications of the subprime market's stress to the near-prime and prime sectors, potential new regulations affecting the mortgage market as a whole, and the timetable for a subprime loan market stabilization. For Big U.S. Brokerages, Subprime Woes Aren't Hurting Profits: The blow-ups in the subprime mortgage market, equity market sell-offs, widening credit spreads, and the sell-off in brokerage stocks, which is greater than the decline in market indices overall, are current issues that Standard & Poor's wants to put into perspective. Going forward, we are more concerned with widening credit spreads and the possibility of lower volumes in M&A deals and IPOs than in activities in the mortgage market. Brokers' earnings have been very strong for several years now and a pullback to lower levels seems likely. Therefore, profitability is not likely to be unusually strong, but just strong. Will The U.S. Subprime Downturn Spread To Mexican RMBS?: Mexico happens to be Latin America's largest RMBS market, with 34 RMBS deals rated since late 2003 and a cumulative securitized volume of more than US$2.8 billion. The good news is this nascent and fast-growing market has used the lessons learned from the country's past financial crises to develop a unique immunity system of sound servicing practices, improvements in federal and local regulations, and a solid mortgage product portfolio that carries several features aimed at protecting borrowers and investors from inflation and interest rate volatility. Subprime Mortgage Lenders Descend Into The Maelstrom: Standard & Poor's expects the shakeout within the sector to continue, with investment banks and possibly hedge funds and private equity firms purchasing distressed subprime lenders or their discounted assets. The advantages these firms will have in vertically integrating a newly purchased origination platform within their existing distribution capabilities will make it difficult for standalone subprime originators to survive. Whatever form it takes, subprime mortgage lending will inevitably continue, as consumer demand for this type of product exists. Subprime Exposure Is Unlikely To Cause Bond Insurers Major Difficulties: Exposure to the subprime mortgage sector does not threaten the rating stability of the bond insurers. Above and beyond their benchmark of underwriting transactions to an investment-grade standard, the industry has exceeded this minimum measure in such a way that macro subprime problems have been limited. Will Subprime Lenders' Woes Trouble The Economy?: Turmoil in the subprime home-lending market has clearly wracked the markets in recent days. While it's obvious that homeowner defaults hurt mortgage lenders, these defaults and the losses that occur from them must be put in a broader economic context. How are they related to other macroeconomic factors, such as housing prices or unemployment? And how might they affect the national economy? About CreditWeek:
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