Moody’s & Fitch Join S&P in Massive Alt-A RMBS Downgrade Avalanche

Posted on August 4th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Just one week after S&P placed over 1600 Alt-A RMBS on downgrade review (final downgrades likely within a few days), Moody’s and Fitch get into the act by actually downgrading hundreds of Alt-A RMBS, most issued by the nations largest banks.  One of my favorite sites, Mortgage Daily, tracked all the deals.

One thing Moody’s mentioned that is very concerning and worth remembering… “due to low current credit enhancement levels relative to current pool projected losses”.  This brings forward a variety of questions.

Remember folks, this is how the real pain of the ‘Subprime Implosion’ began; with the downgrades of thousands of subprime RMBS last year. Only now are they finally acknowledging the losses. Although the raters have been pecking on Alt-A and Jumbo Prime for months, this is the first we are seeing of large scale higher-grade RMBS downgrades across the raters.  

This is so large-scale and across so many different paper types and banks, I think all three leading raters coming out in the same week is a fairly significant development. Especially given that the Alt-A universe alone dwarfs subprime. When you throw in Jumbo Prime and lower grade conventional prime all previous loss estimates can be thrown out the window. 

Everyone seems to think Merrill’s subprime CDO sale marks the bottom of the write-down crisis.  I don’t think so but even if it does mark the bottom of the ‘subprime’ CDO crisis.  Say ‘hello’ to Alt-a and Prime.

Keep in mind, most of the new downgrades you are seeing do not include Home Equity loans (HELOC) or RMBS, which are widely thought to be ‘unratable’. As a matter of fact, on May 2nd S&P announced they have STOPPED rating them  all together citing “anomalous and unprecedented borrower behavior”.  There are $1.1 to $1.3 TRILLION in second mortgages on bank’s balance sheet mostly still owned by the originating banks.  But we will leave this crisis for another story.

Of the stand outs, Goldman Sachs, Bank of America, Chase, Lehman, Deutsche, Merrill, WaMu and CITI were mentioned often.  And in looking at the deals, many consist of Pay Option ARMs, which in my opinion were the most toxic loan every created. 

Judging by my data and research, I believe that ‘Pay Option ARM Implosion’ is upon us.  It is the next phase in the overall ‘mortgage implosion’ and could make the ‘Subprime Implosion’ look like a walk in the park. On July 17th, I posted some good info on the upcoming ‘Pay Option Implosion’ if you need a review on the topic. Also, directly below is a current accelerated Pay Option ARM reset schedule.  As you can see resets have just started to spike and there is a year and a half to go until the peak.

This massive sweep also consisted of Commercial mortgages but you have to check out that for yourself at Mortgage Daily. Below are the residential deals hit. Notice how some stretch back in time to 2002 and one to 1998…nothing is sacred:

Fitch Ratings downgraded classes of the following Alt-A RMBS:

  • First Horizon transactions issued from 2003 to 20072;
  • First Horizon Alternative RMBS from 2006 and 2007;
  • Mortgage Asset Securitization Transactions Inc. deals securitized in 2003 and 2004;
  • ABN AMRO deals from 2002 and 2003;
  • RALI issuances from 1999 through 2004;
  • MLMI RMBS from 2003 and 2005;
  • MLMI MLCC securitizations from 2003 and 2004;
  • WAMU transactions from 2002, 2003 and 2004;
  • Bear Stearns ARM Trust deals from 2006 and 2007;
  • CWMBS issuances from 1998 through 2004;
  • Sequoia Mortgage Funding Corp RMBS from 2003 and 2004;
  • Sequoia Mortgage Trust 10, 11 and 5;
  • GMAC Mortgage deals from 2005 and 2006;
  • HALO 2007-AR1 and 2007-AR2;
  • HSI Asset Loan Obligation Trust 2007-2;
  • IndyMac IMSC issuances from 2006 and 2007;
  • IndyMac MBS RAST securitizations from 2006 and 2007;
  • J.P. Morgan Alternative Loan Trust RMBS issued from 2005 to 2007;
  • Lehman Mortgage Trus transactions from 2006 and 2007;
  • PHHMC 2007-2, 2005-2, 2006-2, 2005-6, 2006-1 and 2006-4;
  • Alternative Loan Trust transactions from 2007;
  • American Home Mortgage Assets Trust RMBS from 2005 and 2006;
  • BA Mortgage issuances from 2003;
  • Banc of America deals from 2003 and 2004;
  • CitiGroup Mortgage Loan Trust transactions from 2004 through 2007;
  • CWALT RMBS securitized in 2005, 2006 and 2007;
  • CWMBS issuances from 2006;
  • Deutsche Alt-A Securities Mortgage Loan Trust issued in 2006 and 2007;
  • Banc of America ALT RMBS from 2006 and 2007;
  • Banc of America Funding deals from 2005 through 2007;
  • Banc of America Funding Corporation issuances from 2007;
  • CitiMortgage Alternative Loan Trust transactions from 2006 and 2007;
  • Merrill Lynch Mortgage Backed Securities Trust deals issued in 2007;
  • Prime Mortgage Trust transactions from 2006 and 2007;
  • RFMSI RMBS issued in 2005, 2006 and 2007;
  • STARM deals from 2007; and
  • WaMu Mortgage Pass-Through Certificates from 2007.

READ THE FOLLOWING BOLD/UNDERLINED TYPE VERY CAREFULLY:

Moody’s Investors Service downgraded five certificates from two GSAMP Mortgage Loan Trust transactions issued in 2002 and 2004 due to low current credit enhancement levels relative to current pool projected losses.

Moody’s also did some Alt-A downgrading due to higher-than-anticipated rates of delinquency, foreclosure, and REO in the underlying collateral relative to credit enhancement levels. Classes from the following deals were impacted:

  • 177 tranches from 19 Deutsche Bank transactions securitized from 2005 through 2007;
  • 108 tranches from 16 GSAA securitizations from 2005 to 2007;
  • 89 classes from 13 Bear Stearns issuances from 2005 through 2007;
  • 42 tranches from 14 First Horizon deals from 2005, 2006 and 2007; and
  • 23 classes from MortgageIT Mortgage Loan Trust, series 2006-1 and 2007-1.

Finally, Moody’s downgraded 55 tranches from 10 scratch-and-dent deals from the Structured Asset Securities Corporation GEL shelf because many scratch-and-dent pools originated since 2004 are exhibiting higher-than-expected rates of delinquency, foreclosure, and REO. The SASCO transactions were issued from 2005 to 2007.”

Where We Are Headed and Downgrade Rationale

House prices have fallen off of a cliff in the past year, especially in CA where according to DataQuick the median price is off 32% since last summer.  This will lead to many more defaults across all borrower types due to the ‘negative equity effect’.  Now in the past week all ‘Big 3’ raters finally took this, among other factors, into consideration and slashed ratings in a big way. (less than 1-month ago S&P affirmed the same ratings).

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 flat to 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 Reportand 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. The New York Times confirmed this is happening with a front page Business Section story on the topic today.

In response to the obvious continued house price depreciation and a surge in defaults awaiting heavy Jumbo Prime and Alt-A regions once summer seasonal demand stops in Aug/Sept, the raters are jumping ahead for once and downgrading a plethora of Alt-A, Jumbo Prime and Subprime RMBS so they are not left flat-footed as with subprime.

The raters are finally understanding the mortgage loan and affordability void left when everyone other than Fannie, Freddie and Ginnie pulled out of the market and 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 than that 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 even more 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.

This story may only be getting started…again – Best Mr Mortgage

Other Related Mr Mortgage Reports

S&P Does Hatchet Job on Prime, Alt-A and Subprime RMBS

Mr Mortgage: June CA Home Sales Report

Mr Mortgage: June CA Foreclosure Report

Mr Mortgage: Mortgage Implosion Round 2: The Pay Option ARM

Fannie/Freddie: Massively Underestimated Risks

33 Responses to “Moody’s & Fitch Join S&P in Massive Alt-A RMBS Downgrade Avalanche”

  1. Where the hell were these guys months ago when the shit was starting to hit the fan? These people are a joke, just like the FED, the SEC and the rest of the present nazi “policy makers.” Free markets..my ass.

  2. MM I have been a reader for the past year you have been right on the money with your research (i personally loved your Cramer time line that guy is a joke).I there any way to find data on the Alt-A to find out how much of tht non-owner occupied? An upside down investor is 10 times more dangerous than ownwer occupied.Great work as always.

  3. Hi Mark…check the Excel spreadsheets here. They are good and free.

    http://www.newyorkfed.org/regional/subprime.html

  4. I think that this fits right in with your analysis here, a troubling article from Asia Times Online:

    http://www.atimes.com/atimes/Global_Economy/JH05Dj01.html

    “The Uppers”

    excerpt:

    “I tend to view subprime as chiefly a “lower end” issue with respect to the real economy, and it is my view that the greatest – as well as least appreciated – bubble economy excesses were at The “Upper-middle” to “Upper-end.” It is in The Upper-ends where years of credit excess had the most pronounced effects on incomes, household net-worth, spending and government revenues.

    It was the at The Uppers where loose finance encouraged many to stretch to buy the expensive home, to lease the luxury vehicle, and to finance the upscale lifestyle – credit creation that then further stoked the overall economy and asset markets. And it was the Uppers that enjoyed spectacular gains in income and financial wealth. It was the momentous changes in Uppers’ spending patterns that spurred enormous real economy investments in a multitude of new businesses and services – a great deal of this spending of the discretionary and luxury variety. It was the Uppers’ windfalls that encouraged state, local and federal governments to rapidly boost spending. These were the inflationary distortions that had a profound impact on the underlying economic structure – over years spurring the transformation to a “services”-based bubble economy.

    It is my view that the Uppers are now in the process of being hit with rapidly tightening financial conditions. This year will see a historic decline in financial sector compensation, led by collapsing Wall Street bonuses and unprecedented layoffs throughout the financial services industry. This week also saw the announcement of major “white collar” job losses at General Motors, an employment trend that I expect to spread throughout the real economy. Many companies and industries must today respond to collapsing profitability (as financial conditions tighten and spending patterns and levels adjust), and there will be no alternative than to shrink “Upper-end” employment and compensation.”

  5. I live in the NYC Tri-state area. Ther eis a lot of Wall St. money here with $2M McMansions. My wife and I looked at houses this weekend. Unreal! This is the first time we’ve seen prices drop below what buyers orginally paid for the houses 3 to 4 years ago. And you know what? We still aren’t going to make an offer. This is just starting to hit the NYC area. CA, NV and FL got hit first. Now, the rest of the isolated parts of the U.S. like Manhattan are going to get wacked!

  6. http://www.youtube.com/watch?v=QPlMmwOq7U8

  7. Will the housing bailout bill soften the ALT-A implosion by any amount at all ?

  8. Good question Todd. But I do not think it will for the banks because remember, they have to reduce the principal balance to 90% of the new value and in states like CA that could mean a 40-60% immediate hit.

  9. I see, thanks… most of the ALT-A resets will be resetting in 2010-2011 is that correct? These homeowners will be getting a $200,000 coupon discount off their house?

    I’m wondering if govt will come up with other crazy bailouts by 2010.

  10. I’d have to agree with your assessment. I live in the Bay Area and know the area well. It is quite obvious that people are living well beyond their means. I doubt there really are many “Prime Loans” out there. Checking foreclosure.com and realtytrac.com, I can see the foreclosures spreading from the subprime areas in the North Bay down to the “prime” areas to the South Bay. Eventurally it may even hit the Peninsula (those folks are so smug that it won’t affect them!) There still some big money to be lost in real estate, IMHO.

    Now that the tide has gone out, we can see who has been swimming naked.

  11. Something has been bugging me for a while now and now that the Alt-A and Pay Option ARMs are beginning their foreclosure cycle I want to ask the question. Why does everyone refer to these loans as something new? These loans have been around since the 70s and where a big part of the S&L crises. Doesn’t anyone over the age of 50 remember “Fogging up a mirrow, would get you a Portfolio ARM at any S&L back in those days?” Those loans were not perfect credit, accepted higher then normal debit to income ratios and had negative amotization up to 115% LVRs. You had payment Options, Interest Only, Less than Interest Only and Fully Amortized. There is Nothing New About those loans, we just didn’t learn our lessons the first time those loans raised havoc on our financial system.

  12. When I was in real estate in late 1999 I brokered a modest home and the new owner immediately second-mortgaged it to buy furniture and a stereo. Even then there was common talk of HELOCs at 115% of equity.

    –Brant Gaede

  13. It’s all very simple and clear–looking back of course–all the lending madness was predicated on real estate prices constantly appreciating or at least never coming down. A constant bailout. “They sowed the wind. Now they’ll reap the whirlwind.” (Bomber Harris)

    –Brant Gaede

  14. Jim T,

    I remember. That’s how I got my first loan. I fogged a mirror. In 1988, it was common to lie with the encouragement of a loan officer for a “no doc” loan. The reality was a loan that soaked up way too much of my income. I paid that crazy thing off as fast as I could and lived on beans and rice until it was done. I lucked out in that house prices were already at a bottom in my area by then. These liar loans are nothing new. They have been doing it since 1988, at least. The difference is that now they have been pushed onto many more people through massive advertising of the product and industry collusion. For someone to make $50,000 commission on one loan from DSL is absurd and fundamentally wrong in every business sense of the word. They weren’t making that kind of money per loan back in 1988. What changed? Wall Street. That is the only difference between then and now. That is where the fault lies. Let’s bail ’em out and get them working on the next bubble so they can suck this country as dry as a dessicated corpse.

    You will notice that today JPM announced it will start in on asian real estate since that program seems to have dried up over here. Of course, JPM has to stay solvent that long but maybe Uncle Hank will help out by handing out some tax dollars. I am so disgusted by it all.

  15. Unless I’m mistaken, most, if not all, of these Neg Am’s have stips in the contract that say if your equity has fallen below a certain threshold, that your loan immediately resets regardless of the previously agreed to timeframe. Depreciation will accelerate that one more than anyone predicts, you can “bank” on that one. But wait, there’s more! Couple the depreciation with the 80% of the people paying the negative amortization payment every month (you go backwards every month), and you have yourself a loan resetting faster than you can say FORECLOSURE. I predict that by the end of the first quarter of 2009 we will be in a total armagedon-style situation with these things.

    My guess is, not matter how many times you yell it from the mountain tops, that most investors will still have their back to the ocean thinking they have until 2012 before peak when in fact the wave has already snuck up behind them and is about to wipe them out WAY ahead of schedule.

    Ugly, just plain ugly.

  16. JRB, that is my understanding as well on these Neg Am loans. I recently read this article and it blew me away to see what the difference was when the loan reset. I thought it was a slow thing that eventually got you, but this is instant death for most.

    Time frame of resets is into 2012 but I think most will be done long before that. I have read estimates as high as 3 million foreclosures for 2008 alone. As big as that number is… it wouldn’t surprise me in the least.

    The real story is about to unfold and it ain’t subprime, and it ain’t going to be pretty!!!

  17. WOW!!!

    I just read this and I really can’t (well I guess I actually can) believe this!

    GM, Ford and Chrysler are asking Congress for a “Bail Out” of sorts. They want the American Tax Payer to back stop $35 billion – $40 billion in low-cost loans.

    WHEN will this all end???

  18. What if it doesn’t end? What will happen? Inflation, deflation?

    I’m so confused these days.

  19. I am with you od…

    Deflation is certainly the order of the day now. Even though food and energy are inflated, it appears like almost everything else is deflating. Certainly a case could be made for stagflation, but then again hyper-deflation is plausible as well…

  20. […] Moody’s & Fitch Join S&P in Massive Alt-A RMBS Downgrade Avalanche […]

  21. Excuse me, but HYPER-INflation is what’s on the books for us all. Can’t say when, but it’ll be sooner than any of us want to think. Plan accordingly. It’s coming.

  22. There’s a fiat explosion, thanks to the FED, which is warping financial reality across the board.

    Not only are home values dropping, but the currency in which it’s denominated is too. A double whammy which is self perpetuating.

    Where to find safety and perhaps incredible profits? Gold and silver.

    There will be a final ‘bubble’ starring trillions of investment capital attempting to squeeze into the tiny precious metals markets…result = astronomical gold and silver prices.

    Timing? Once the dollar pukes expect a flight to safety, then irrational exubberance (herding) like you’ve never dreamed of.

  23. […] Moody’s & Fitch Join S&P in Massive Alt-A RMBS Downgrade Avalanche […]

  24. […] Moody’s & Fitch Join S&P in Massive Alt-A RMBS Downgrade Avalanche […]

  25. […] Moody’s & Fitch Join S&P in Massive Alt-A RMBS Downgrade Avalanche […]

  26. […] Moody’s & Fitch Join S&P in Massive Alt-A RMBS Downgrade Avalanche […]

  27. […] Moody’s & Fitch Join S&P in Massive Alt-A RMBS Downgrade Avalanche […]

  28. […] So It Begins – The NEXT Implosion For more than a year I and Mr. Mortgage have been telling you that the real story in housing isn’t "subprime" – its ALT-A […]

  29. […] Moody’s and Fitch Join S&P in Massive Jumbo Prime and Alt-A Downgrade Avalanche […]

  30. […] Moody’s and Fitch Join S&P in Massive Jumbo Prime and Alt-A Downgrade Avalanche […]

  31. […] While I’m talking about Alt-A mortgages, here’s another story that fits like a hand in a glove with the previous one. “Mr. Mortgage”…posting at ml-implode.com…has the deep background on the Alt-A mess. The headline reads “Moody’s & Fitch Join S&P in Massive Alt-A RMBS Downgrade Avalanche”. RMBS stands for Residential Mortgage Backed Securities. “Mr. Mortgage” says “it could make the ’subprime implosion’ look like a walk in the park.” As I’ve said before, call me in 2013 and then we’ll talk about a real estate bottom. The link is here. […]

  32. great post !!
    I read a few of your other entires.where can i subscribe to your blog?
    Thank you for sharing.

  33. […] While I’m talking about Alt-A mortgages, here’s another story that fits like a hand in a glove with the previous one. “Mr. Mortgage”…posting at ml-implode.com…has the deep background on the Alt-A mess. The headline reads “Moody’s & Fitch Join S&P in Massive Alt-A RMBS Downgrade Avalanche”. RMBS stands for Residential Mortgage Backed Securities. “Mr. Mortgage” says “it could make the ’subprime implosion’ look like a walk in the park.” As I’ve said before, call me in 2013 and then we’ll talk about a real estate bottom. The link is here. […]

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