According to S&P: "Due to the presence of overcollateralisation and excess spread, the RMBS collateral could generate what we view as a significant amount of losses before a rated certificate would experience a principal writedown." Although the subprime mortgages underlying RMBSs from late 2005 to mid-2007 will eventually take a total of $180 billion in losses, S&P predicts the RMBSs themselves will be written down by only $85 billion - and the $338 billion in AAA tranches could be written down by just $2.9 billion, less than 1%.
The ratings agency also considered the effect of stress scenarios on ratings of RMBSs. In a scenario where loss severities increased to 65%, S&P projects that most of the certificates originally rated A+ or lower in 2006 and in the first half of 2007 would be completely written down, while many certificates originally rated in the AA category would be badly affected. Certificates originally rated AAA in 2006 and the first half of 2007 would be written down by 3% and 6%, respectively, while AAA rated certificates in the second half of 2005 would still be written down by less than 1%.
S&P predicts different vintages of securities will incur varying writedowns. The rating agency expects principal writedowns on RMBSs from late 2005 will total approximately $13.7 billion (16% of the total projection of $85.1 billion); those issued in 2006 will experience principal writedowns of $50.2 billion (59%); while in the first half of 2007 they will be $21.2 billion (25%).
Due to poor collateral performance, S&P notes that total and serious delinquencies for subprime transactions issued in the first half of 2007 are at historic highs. The agency predicts 84% of A rated certificates and 52% of the certificates originally rated AA will be written down. Similar to earlier vintages, S&P predicts 2007 certificates originally rated AAA will experience minimal writedowns - only 33 of the 165 transactions rated in the first half of 2007 are expected to incur a principal writedown.