House prices have fallen off of a cliff in the past year, especially in CA where according to DataQuickthe median price is off 32% since last summer. Today, S&P got spooked and finally took this into consideration and slashed ratings across Prime, Alt-A and Subprime RMBS (less than 1-month ago they affirmed the same ratings). Fitch echoed similar sentiment last week…this is a good read too.
This is the first summer selling season without exotic loan types such as Pay Option ARMs, second mortgages to 100% CLTV, Stated income/stated assets, aggressive intermediate-term ARMs etc to drive affordability meaning this summer selling season should end up considerably weaker than expectations and previous years.
Sales, while climbing ever so slightly over the past few months, are actually falling when you take out foreclosure-related sales, which made up some 42% of the entire CA home sales market last month. When stripping out foreclosure-related sales ‘organic’ sales for June were at a multi-decade low and not even at the pace of new foreclosures. Please see my June CA Home Sales Report and June CA Foreclosure Report .
Subprime foreclosures have leveled off and began to decline slightly but Alt-A defaults, which lead foreclosures by 4-6 months are surging led by Pay Option ARMs.
In response to the obvious continued house price depreciation awaiting heavy Jumbo Prime and Alt-A regions once summer seasonal demand stops in Aug/Sept and massive defaults/foreclosures follow, S&P jumped ahead for once and downgraded a plethora of Jumbo prime, Alt-A and Subprime RMBS today.
The raters are finally understanding the ominous impact that negative equity has across all loan types and borrower grades. Negative equity knows no bounds. While factoring in the unprecedented home price deprecation seen in the past 12-months and projecting that out, they are discovering that those who purchased a home as early as 2004 are now under water and at an exponentially greater risk of default. Even many who purchased much earlier and put a second mortgage on the property are in a negative equity position. This is making their modeling systems ‘TILT’. Due to this I believe we will see some serious ratings actions over the next 90-days stretching deep into the heart of the ‘Prime’ loan sector.
S&P also focuses in more closely this time around on later vintages from 06-07. This is not so great for those thinking that later vintages are ‘better’ such as those reporting that the Merrill CDOs sold for pennies on the dollar were ‘worse’ because they consisted heavily of 2005 and prior.
In my opinion, 2005 and prior are BETTER than 2006-2007 because underwriting standards were better and those that bought their homes in 2005 and prior and did not cash out since, owe closer to the current value of their home and therefore are in less of a negative equity position. – Best Mr Mortgage
NEW YORK, July 29 (Reuters) – Standard & Poor’s revised higher its loss assumptions for a variety of residential mortgage-backed securities on Tuesday, amid concerns home prices may record deeper-than-expected declines and drive loan losses higher.
In early July, the rating agency affirmed its loss assumptions for U.S. RMBS 2006 vintage, based on its outlook for the housing market. It projected an additional 10 percent decline in home prices by June 2009.
Since then, however, weaker-than-expected U.S. housing and mortgage loan performance data in July led S&P to modify its default curve methodology for 2006 and first-half 2007 loans in the U.S. subprime, prime jumbo and Alt-A RMBS market.
S&P noted the rising level of foreclosures and the costs associated with them, the increased carrying costs of properties held in inventory and distressed sales for its latest revision. Declining home sales will depress prices further, it said, and boost losses more than previously assumed. Continued at Reuters.
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