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Moody's downgrade 691 securities backed by second-lien mortgage loans

August 16, 2007 -- Moody's Investors Service today announced downgrades on 691 securities originated in 2006 and backed by subprime closed-end second lien mortgage loans. A closed-end second lien mortgage loan is a loan secured by a second priority mortgage lien on residential real estate, and is advanced in a specified amount at the closing of the loan. When closed simultaneously with a first-lien mortgage loan to purchase a home, these loans are often known as "piggyback loans". Securities backed by second-lien mortgages represent roughly 7% of the total volume of subprime mortgage-backed securities rated by Moody's in 2006.

Today's rating actions affect securities with an original face value of $19.4 billion, representing 76% of the dollar volume and 84% of the securities rated by Moody's in 2006 that were backed by subprime closed-end second lien loans. An additional 14 securities were placed on review for possible downgrade.

The actions reflect the extremely poor performance of closed-end second lien subprime mortgage loans securitized in 2006. These loans are defaulting at a rate materially higher than original expectations. Aggressive underwriting combined with prolonged, slowing home price appreciation has caused significant loan performance deterioration and is the primary factor in the negative rating actions.

Among the securities downgraded today were 78 Aaa-rated securities and 150 Aa-rated securities, most of which migrated by one rating category or less. Of the Aaa downgrades, 84% moved to the Aa category, 12% to A, and 4% to Baa. Of the securities downgraded from Aa, 70% were revised to no lower than A3, with 29% falling into the Baa category, and 1% to Ba.

At the other end of the credit spectrum, 225 of today's downgrades were to Caa, Ca, and C ratings. The dramatically poor overall performance of closed-end second lien mortgages originated in 2006 has already impaired or is expected to impair junior tranches from most 2006 deals backed by these types of loans. When combined with previous rating actions, subprime closed-end second lien mortgages now rated Caa or below represent nearly 7% of the dollar volume rated by Moody's.

(This is the press release of Moody's Investors Service)

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