Thursday, Jul 19, 2007
This is just the beginning
Calculated Risk Blog: S&P Downgrades 419 Second Lien Classes
NEW YORK (Standard & Poor's) July 19, 2007--Standard & Poor's Ratings Services today lowered its credit ratings on 418 classes of U.S. residential
mortgage-backed securities (RMBS) backed by U.S. closed-end second-lien mortgage collateral issued from the beginning of January 2005 through the end of January 2007. . . .
Posted by lvmreader @ 08:44 PM (216 views) Add Comment
3 Comments
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1. dobber said...
'The downgrades on the 418 different classes were spread across the various ratings categories as follows: 34.62% were from the 'BBB' rating category, 25.42% were from 'BB', 17.19% from 'A', 16.22% from 'B', 3.15% from 'AA', 2.66% from 'CCC', and 0.73% from 'AAA'. Therefore, 78.93% of the lowered ratings were from classes rated 'BBB+' or lower. (It should be noted that although there are eight 'AAA' rated classes included in this analysis, they are actually from only three transactions.) . . .'
The investment grade is slowly being re-rated and becoming junk, get ready for mass forced disposals by the institutions.
2. lvmreader said...
The Center for Responsible Lending estimates that 2.2 million borrowers who got subprime loans since 1998 either have lost or will lose their homes through foreclosure over the next few years. This includes one of every five borrowers who got subprime loans in 2005-06, a default rate unmatched in the history of the modern mortgage market.
You can go to your Bloomberg quote machine and pull up residential subprime structured finance deals. What you find is one RMBS that was issued in 2006 that already has over 54% of its loans more than 60 days delinquent and 17% of them in foreclosure. Think the buyers of that equity tranche stand a snowball's chance of getting anything?
Has this security been re-rated? No, because the ratings agencies say they cannot re-rate something until they know for certain there are losses. They can't act on suspicion. However, I do remember them putting out warning notices for various bonds and corporate offerings prior to re-rating. I would think those are coming.
3. lvmreader said...
http://news.goldseek.com/MillenniumWaveAdvisors/1183302060.php
$250 Billion in Subprime Losses?
The problem is that if these offerings lose their investment grades, many institutions will be forced to sell, as they are limited by their charters to only invest in rated paper. But who will buy until the smoke clears? It will get ugly. This will end in tears.
"The highest default rates on home loans in a decade have reduced prices of some bonds backed by mortgages to people with poor or limited credit by more than 50 cents on the dollar and forced New York-based Bear Stearns Cos. to offer $3.2 billion to bail out a money-losing hedge fund. Almost 65 percent of the bonds in indexes that track subprime mortgage debt don't meet the ratings criteria in place when they were sold, according to data compiled by Bloomberg.
"That may just be the beginning. Downgrades by S&P, Moody's and Fitch would force hundreds of investors to sell holdings, roiling the $800 billion market for securities backed by subprime mortgages and $1 trillion of collateralized debt obligations, the fastest growing part of the financial markets." (Bloomberg)
How much could the losses be? It depends on who you ask, but estimates of $150 billion or more are quite common. Institutional Risk Analytics, a Hawthorne, California-based company that writes computer programs for accounting firms, says 25% of the face value of CDOs is in jeopardy, or $250 billion. But no one really knows. It is all guesswork, except that everyone seems to agree it will be large.
The rating agencies use various models to come up with their ratings. But a recent study suggests that if you "take the 300 bonds that are used in the ABX indexes, the benchmarks for the subprime mortgage debt market, 190 fail to meet the credit support standard, according to data released in May by trustees responsible for funneling interest payments to debt investors.
"Most of those, representing about $200 billion, are rated below AAA. Some contain so many defaulted loans that the credit support is outweighed by potential losses. Fifty of the 60 A rated bonds fail the criteria, as do 22 of the 60 AA rated bonds and three of the 60 AAA bonds.
"All but five of 120 securities in BBB or BBB-rated portions of the mortgage-backed securities would have failed S&P's criteria, according to data compiled by Bloomberg."
Bottom line: no one knows how large the losses will be. Right now the "hope" is that they are spread out among hundreds or thousands of various funds, institutions, and agencies, and thus there will be no major failures or systemic risk.
So while it may not directly affect other types of bond offerings, it is definitely going to affect the appetite for risk, which in the long run is a good thing, as deals were getting done that were questionable. Nothing helps concentrate the mind like the prospect of a hanging, said Judge Roy Bean. And nothing helps you focus on risk like a serious loss in your portfolio.