S&P Announces: U.S. RMBS Market Expected to Be Strong in 2004 Despite Slip in Issuance.

Business Editors

NEW YORK--(BUSINESS WIRE)--Jan. 7, 2004

Although issuance volume of U.S. private label residential mortgage-backed securities is expected to slip 30% to $400 billion in 2004 from a record $575 billion in 2003, the market is still relatively healthy, according to credit analysts at Standard & Poor's Ratings Services. The fundamentals of the U.S. housing market, and the U.S. private label market in particular, are still strong. In addition, solid performance in the credit ratings of U.S. residential mortgage transactions is anticipated.

The expected decrease in private label issuance is far less than the 50% drop the Mortgage Bankers Association is forecasting for total mortgage originations in 2004; these reached a historic peak in 2003 of approximately $3.5 trillion. Standard & Poor's Chief Economist David Wyss said that housing starts would be strong because mortgage rates will continue to be low by standards of recent history. Starts are also being swollen by baby boomers now in their 50s, the traditional time to buy second homes. Although most baby boomers will stay where they are, those who move are likely to downsize to co-ops or condos in downtown areas, which may be less spacious, but not necessarily cheaper. Many will choose to buy a second home, usually in a warmer climate. This trend could keep the Alt/A and purchase money mortgage markets strong.

The average price for new homes sold in the first nine months of 2003 was $240,700, up by 8.2% from 2002. For the third quarter alone, the increase was 12.8%. The fundamentals for house price appreciation, including baby boomers buying second homes, immigrants buying first homes, historically low mortgage rates, and house price affordability, continue. House price appreciation for 2004 should carry on, albeit at a slower pace. This trend would maintain some of the market momentum found in the cash-out mortgage market, including subprime and second-lien markets.

Surveillance of residential mortgage transactions resulted in a record number of ratings changes during 2003, with the number of upgrades taken to new heights. Surveillance activity for the year resulted in 1,288 rating changes: There were an unprecedented 1,192 performance-related upgrades, 61 performance-related downgrades, and 35 corporate-rating-dependent downgrades. The catalysts for such robust rating activity were extraordinarily fast principal prepayments driven by mortgage loan interest rates that reached a 40-year low, seasoning of the underlying mortgage loans, the shifting interest features of the transactions, market value appreciation, moderate delinquencies, and low losses. The actual one-year rating stability ratio (the number of ratings affirmed or upgraded, divided by the total number of ratings outstanding) for Standard & Poor's rated U.S. RMBS is approximately 99%.

Standard & Poor's anticipates continued solid performance in the ratings of U.S. residential mortgage transactions. Barring dependent rating downgrades in the corporate sector, upgrades will continue to greatly outnumber downgrades. The effect of a modest increase in mortgage rates projected by Mr. Wyss in 2004, coupled with "prepayment burn out," will slow the rate at which the transactions prepay, as well as the degree of shifting interest in the deals. As a result, a gradual return to upgrades primarily on more seasoned transactions may be witnessed.

National delinquency rates in existing transactions have been modest, which is consistent with the national unemployment rate. While the current unemployment rate of 5.9% is high relative to recent years, it is historically moderate. A significant increase in the number of delinquent loans during 2004 is not expected.

Despite the inevitable slowdown in rate/term refinance activity, the mortgage market has many ingredients for continued success: historically low interest rates, benign inflation, expansionary fiscal policy, and an increasing supply of potential homebuyers.

Standard & Poor's, a division of The McGraw-Hill Companies, provides widely recognized financial data, analytical research and investment, and credit opinions to the global capital markets. With more than 5,000 employees located in 20 countries, Standard & Poor's is an integral part of the global financial infrastructure. Additional information is available at www.standardandpoors.com.