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56 | Th e M Rep o RT O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t SECONDARY MARKET the latest SECONDARY MARKET moody's downgrades $2.7m of FHa/va rmBs issued by Fannie mae The recent reduction stems from the company's current loss expectations on a trio of tranches. m oody's Investors Service recently released a rating action report reveal- ing that it has downgraded the ratings of three tranches issued from Fannie Mae REMIC Trust 2001-W3. This deal is collaterally backed by first-lien fixed and adjustable rate mortgage loans insured by the Federal Housing Administration (FHA), an agency of HUD, or guaranteed by the Veterans Administration (VA). Moody's Rating Actions for Issuer: Fannie Mae REMIC Trust 2001-W3: • M, Downgraded to Ba2 (sf); previously on Oct 4, 2013, Downgraded to Baa3 (sf) • B-1, Downgraded to B1 (sf); previously on Oct 4, 2013, Downgraded to Ba2 (sf) • B-2, Downgraded to Caa2 (sf); previously on Oct 4, 2013, Downgraded to B3 (sf) "The rating actions are primarily a result of the recent performance of the FHA-VA portfolio and reflect Moody's updated loss expectations on this pool and the structural nuances of the transaction," Moody's reported. "The ratings downgraded are primarily due to the erosion of credit enhancement supporting these bonds, due to the amortization of the subordinate bonds and losses incurred by the subordinate bonds." According to the Moody's report, the FHA guarantees 100 percent of a loan's outstanding principal, a large portion of its outstanding interest, and foreclosure-related expenses if the loan happens to default. Meanwhile, a VA guarantee only covers part of the principal based on the lesser of either the sum of the current loan amount, accrued and unpaid interest, and foreclosure expenses, or the original loan amount. HUD usually pays claims on FHA loans that default when claims are submitted by servicers, but this can create a substantial amount of penalties for servicers if irregularities are discovered later during servicer audits. A number of uncertain macroeconomic activities affect whether a rating is upgraded or downgraded in the U.S. RMBS sector. The unemployment rate is one of those factors that could lead to rating actions in the sector. The unemployment rate fell to 5.4 percent in April from 6.2 percent the same month last year. Moody's predicts that unemployment will fall between 5 percent and 6 percent for the 2015 year. The report also notes that house prices and servicer procedures drive U.S. RMBS performance. "Moody's expects house prices to continue to rise in 2015," the company reported. "Lower increases than Moody's expects or decreases could lead to negative rating actions. Any change resulting from servicing transfers or other policy or regulatory change can impact the performance of these transactions." Moody's did not receive or take into account a third- party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of this transaction in the past six months, according to the report.