S&P Slashes $34 Billion in ALT-A Securities. ALT-A…The Next ‘Crisis’

Posted on May 28th, 2008 in Daily Mortgage/Housing News - The Real Story

I have written enough about ALT-A to fill a phone book, so at the bottom of this post is the story summarized by Bloomberg. ALT-A is from where the real disaster in the bubble states like CA will come.

The ALT-A crisis may make the subprime crisis look like a bump in the road when all is said and done.This story is really picking up steam lately, but it seems like as with the suprime crisis at the beginning, the mainstream media and definitely Washington is not giving this much attention. In my opinion, the ALT-A space collapsing could cause much larger crisis for the broader economy because ALT-A loans cut across all socio-economic boundaries and were used most heavily in in the nation’s most affluent cities/regions.

If you watch the video I did last month called ‘ALT-A Disaster Looming, Know the Facts’ I go over the loan characteristics of the ALT-A universe. While much is identical to subprime, the average Alt-A borrower has an average credit score over 700 and they are still defaulting at a 14% rate when this video was done and 18% now. This is exactly how subprime defaults began over a year ago.

Many said a year ago+ when New Century collapsed that they were the ‘canary in the coal mine’. I have always said ‘the entire subprime sector is the canary in the coal mine’.

Below is the Bloomberg/S&P release and various Mr Mortgage reports on the ALT-A crisis coming to a city near you right now. -Best Mr Mortgage


S&P Cuts, Reviews $34 Billion of Alt-A Securities
By Jody Shenn

May 28 (Bloomberg) — Standard & Poor’s cut or may lower ratings on almost $34 billion of securities backed by Alt-A mortgages, the firm’s largest downgrade for the type of debt.

Ratings on 1,326 classes of the bonds created in the first half of 2007 were reduced, New York-based S&P today said today in a statement. S&P put another 567 similar bonds with AAA ratings under review. Based on the balances of the bonds at issuance, 14 percent of the total from the period were either cut or placed under review.

Late payments of at least 90 days and defaults among Alt-A loans underlying bonds issued last year rose to 6.64 percent as of April bond reports, up 65 percent since January, S&P said. Defaults on all types of home loans have surged amid record U.S. property-price declines.

Alt-A home loans were made to borrowers who wanted atypical terms such as proof-of-income waivers, delayed principal repayment or investment-property collateral, without having to offer sufficient compensating attributes.

Call for Changes

The International Organization of Securities Commissions today called for changes at ratings firms in response to their failures to accurately assess the risk of mortgage securities, including independent reviews of the way rankings are assigned.

The firms will be banned from recommending how products are structured to help prevent conflicts of interest, according to Madrid-based IOSCO, the forum for more than 100 regulators. The companies also should create new ratings to differentiate structured bonds from corporate securities, it said.

S&P has downgraded 66 percent of 2007 subprime-mortgage securities, by the number of classes, and 96 percent of 2007 second-mortgage bonds. The firm’s downgrades on collateralized debt obligations used to repackage mortgage bonds into new securities total more than $350 billion, its biggest cuts amid the housing slump.

18 Responses to “S&P Slashes $34 Billion in ALT-A Securities. ALT-A…The Next ‘Crisis’”

  1. Alt-A instead of being a bump in the road will be the bump on the head that knocks out the market and forces financial institutions to recognize that there is a real problem. I don’t see how you can fix such a problem on a short term basis. This monster will probably take 10 years to fix, exactly like in Japan. Massive massive dilutions lie ahead.

  2. this is supply and demand, subprime was the weakest and first, alt-a is the 2nd but the final scene is “A”. it was never about the loans, it is the property falling 50% stupid, buckle up………

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  4. Great blog MM, downey looking like it might be one of the first casualties of alt-a…slightly OT: going to a foreclosure auction in a few wks here in tampa where the borrowers original loan was for about 100k back in 1990 and has cash out refied multiple times over the yrs up to 340k and of course is in foreclosure. Another one down the street also in foreclosure has a 1.6 mil loan which goes to show you its hitting at all levels. MM do you have any good sites I can read up on potential issues to look for out?

  5. It was never about the loans ? If you lend 800,000$ to a person earning 14,000$ a year, it’s about the loan, but it’s also about the people working in finance and banking. 500 billion of liar loans is definitevely about the loans. The property is falling 50% because of the loans and the complete lack of ethics in the US. I know of two other countries in the world, Great-Britain and Spain, that allowed such stupidities and FRAUD ! Who says that the presumed high quality Alt-A loans are not also liar loans ? At least some of them ? Call me paranoid, I have absolutely no confidence in banks and far less in ratings agencies.

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  7. MM thanks for all the great info you provide

    Of course it is about the loans. Lehman was giving $1,000,000 to first time buyers with an LTV of 95-100 and stated income and FICO of 620? Are you kidding me? Housing is tanking because of the loans issue not vice versa. It is definitely going to hit all ranges of mortgages eventually. slowing economy means job losses which means defaults on mortgages, car loans, and CC debt. CC debt gone bad will be the final nail in the coffin. No asset to pickup after the default. I saw a graph showing where in 2007 almost 20% of new car sales in FL were purchsed with HELOC $. It was alomost 30% in CA. These people in their 50K suv’s have seen their value plummet as gas goes up. It’s a perfect storm of financial cr4p.



    PRICE TAG …….200B TO 400B.
    DO IT.

  9. Nah! Make another war. Bomb Iran. More to the point. It’s very funny today. Dow Chemicals boosted all their prices (100%) in one big swoop by +20%!

    Same for Monsanto, General Mils, Hershy +40%, Occidental, Ashland, Meridith. The list of prices increases today goes on and on and on.

    By the way the LIBOR is exploding, the credit swaps are “misbehavvin” again on Lehman Brothers and Merril Lynch. What else interest rates on morgages are going up and unemployment is up to. But not to worry the folks on bubble TV are really bullish today. Oh and GM is laying another 10,000 employees. GREAT !

  10. I don’t know if we’ll have slow decline a la Japan. I’ve seen things drop very quickly in my area since Feb 2008 ($25000 per month). Between Jan 2006-Jan 2008, it was a slow decline with seasonal upticks ($7916 decline per month). I’ve seen other areas be further along or behind in the timeline.

    I watched a house sell for $560K in Nov 2005 (original price: $300K in 2001). It went REO and finally sold for $370K in Dec 2007. Comps held up through Feb and things stopped selling. Now a comp is pending with short sale approval at $295K. This comp is better in every way with loads of upgrades.

    I am a pretty big housing bear, but I can’t believe my target price for that house has been exceeded. I thought at the bottom, this house would be worth $310K.

    Since the crisis is only just starting up, I don’t know where it’s going to land. Perhaps $220K as that’s 3.5x median income and it is a median house. (11.5x annual rent.)

  11. That’s if the median income also does not go down also.

  12. Rumors of MS buying out LEH on Yahoo Financial (or at least a proposal). Prices rumor between $8 to $20 per share. Also posted is “DJ Fitch Takes Various Actions On 49 Lehman Alt-A Deals” is going to force LEH to mark to market several trusts on Friday. Despite all this, LEH rallied into after hours.

  13. Housing is not tanking, it’s reverting to the mean (with a little bit of overshoot thrown in for good measure). There is a big difference between something tanking and something that is rediculously overvalued returing to a mean that is based on fundamentals.

  14. just wait for my next research piece due out in the next 24-hours…it says the exact opposite. Median home prices in CA are down 27% in 11 months in CA. A 10% drop in one year in 1932 was considered a crash. That was the only other time in history real estate has experienced a double digit drop in 12 months. You tell me what 27% is considered.

  15. Minus 27% ? Does it include the effects of inflation rate ? The Case/Shiller adjusted to the CPI gives -21% for the whole country.

    Housing is tanking.Whatt about the rest ?
    Yeah try to say that to a moron who bought an internet stock in 2000. Reversion to the very mean. Reversion to less than zero. A lot of people are getting real poor. What’s the number of people with negative equity again ? 10 million households ? 15 million ? 20 million ?

    With everything going up in price like a rocket, you can bet that the number of people with negative equity will explode again and again. Mean times.

    Housing is not tanking ? Scuzi ? I presume that the states, towns and federal budgets are in fantastic shape ? You are soo lucky to have all these stupid and l moronic foreigners financing again and again one bubble after another.

    I would like to know ? What will be the next bubble ?
    Housing is imploding. So is GM and Ford. And what about the big picture ? Don’t believe the phoney numbers on the GDP and the GNP.

  16. Joe Pa: Pretty much all of the housing bears agree that housing is just reverting and overshooting the mean. We knew the market would have to drop because of this measure, and we exited the market while the exiting was still good.

    However, in the eyes of Joe Six Pack, housing is tanking. If they purchased, refinanced with cash out or HELOCed in the last 4+ years (depending on area, etc), their highly leveraged investment is going sour. It is hard to see from their eyes, but that is an important view point to understand going forward.

  17. That’s right, housing is NOT tanking. So, would you think $3 a gallon of gas is cheap now too right… It’s all relative to the time frames that you are referring to when looking at the data. In addition, it’s more of a choice of words and Tanking is not the right word for what is happening. Boo hoo on the states and cities that are in poor shape. Yeah it sucks that our taxes are going to go through the roof to cover their bad decisions but they got along fine in 2001 when tax revenues were not nearly as high as they were in 2005, so where did all that extra money go? Bloomberg said it best (even though I am not a Bloomberg fan) when NYC had a mulit-billion dollar surplus in tax revenue, he said now is not the time to get greety and spend, it is the time to save for a rainy day. Well you know what, it’s raining…

  18. Joe Pa. It’s mostly the stupid Russians, Chineese, Vietnameese, Ukrainians, Indians, and innumerable number of poor countries with pegged currencies to the US dollar, that are footing the bill. That’s the beauty of the system ! Your US suffering is minimal, believe me.

    Your problems are still quite small compared to the total chaos that Bernanké has unleashed in Africa, Eatern Europe, Africa and Asia.

    30% inflation rate is becoming the rule in these really damn stupid moronic countries pegged to the US dollar.
    Argentina all over again for them. These are the real victims, not the US. Naturally nobody in the US is really talking about the collateral damage in strange and faraway lands.

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