S&P Goes After Jumbo Prime With Heavy Downgrades

Posted on August 12th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

S&P hammered ‘Jumbo Prime’ RMBS backed by loans made in the first half of 2007 today.  Much of this was a final decision from their May 22nd placment of these RMBS to ‘CreditWatch Negative’. 

The RMBS involved in this first of many sweeps are from: Bank of America, Chase, CHL, Citi, Credit Suisse, First Horizon, HSI, Merrill, RFMSI, Sequoia and WaMu.

Why in the world did it take two and a half months to finalize the downgrades?  Perhaps they were waiting for the stock market to stabilize.  Their typical time frame would have brought these out in early to mid-June the markets were in free fall led by the financials. Don’t ya think the time for games has come and gone guys?

Although these downgrades are nowhere near as large as the Alt-A and Jumbo Prime slaughter from Moody’s, Fitch and S&P over the past couple of weeks, they touch upon the sacred ‘Jumbo Prime’ universe thought to be immune to the nations real estate and mortgage woes.

“NEW YORK(Standard & Poor’s) Aug. 12, 2008–Standard & Poor’s Ratings Services today lowered its ratings on 248 classes from 20 residential mortgage-backed securities (RMBS) transactions backed by U.S. prime jumbo mortgage loan collateral issued in the first half of 2007.”

S&P used 1999 vintage loans as a benchmark, which I don’t think is appropriate.  This is because the few years before and after 1999, the market was essentially unchanged in terms of loan product available and underwriting standards. In addition, prices rose from 1999 and never stopped until Q2 2007.

In the first half of 2007, we still had most of the exotic loan programs, very lax underwriting standards and prices were at their all time peak. Since then, all exotics are gone, underwriting is tighter than ever and prices are down the most in history, falling 32% on the median in the State of CA in the last 14-months. The 1999 and 2007 universes are vastly different. S&P acknowledges this but I suppose had no better year for a benchmark so they are essentially making this up as they go.

“The downgrades reflect our opinion that projected credit support for the affected classes is insufficient to maintain the previous ratings, given our current projected losses. We used the 1999 prime jumbo vintage as our benchmark default curve to forecast the performance of the 2007 vintage. The 1999 vintage experienced the most stress of any issuance year over the past 10 years (excluding recent years since 2005) in terms of foreclosures. We expect the losses in 2007 to significantly exceed those experienced in 1999″

One thing is for sure, they are likely very close to nailing the ‘cure rates’ once a loan becomes delinquent.

we assumed that 100% of the 90-plus-day delinquent loans and 50% of the 60-day delinquent loans would be in foreclosure within five months.”

They also provide some relatively realistic insight on the REO market and how long the property can sit on the banks shelves.

“Due to current market conditions, we are assuming that it will take approximately 18 months to liquidate loans in foreclosure and approximately eight months to liquidate loans categorized as real estate owned (REO).

Today’s S&P action follows even heavier action by Fitch, Moody’s and S&P on Alt-A and Jumbo Prime, which I recently covered.

One thing is for sure folks, the ball is rolling uphill, like I have warned so many times in the past from Subprime to Alt-A to Prime. It is inevitable. -Best, Mr Mortgage

Source: Standard and Poors




18 Responses to “S&P Goes After Jumbo Prime With Heavy Downgrades”

  1. Excellent post Mr. Mortgage. However, I follow the Miami crash on my blog and I think that South Florida will eventually beat California in crash magnitude. I wish you guys would cover the issues going on here more. Then again, without seeing this circus first hand, you probably wouldn’t grasp it. Our market peaked in July-August 07 vs. most others that peaked in summer of 05 or 06 at the latest. Our banks lent to people without accurate contact info, driver’s licenses, or REAL NAMES. It is going to be a bloodbath. An absolute bloodbath and I have a blog to prevent innocent Americans and foreigners from getting suckered into catching a falling knife. I make absolutely no money from my site: http://www.miamicondoforum.com

  2. Mr. M, when you going to come out with your July Forcl. video?

  3. Hi Mo…I agree. I will get more into FL but I know CA cold, we are 45% of the foreclosure market, are the epicenter for subprime and will be the epicenter for Alt-A and Prime implosions. FL is a wild state but I will be adding in the future. Thanks.

    Realist – today I hope.

  4. It’ll be interesting to see what happens to the banks that keep these jumbo-prime loans in their portfolio. Many smaller southern California credit unions for example, were giving $1.5 million dolar stated loans away like Halloween candy 3 years ago. How about ING? These jumbo prime folks can’t get a new stated loan when their ARM adjusts, and have only ridiculous rate options in the very few options where they qualify full doc. The banks created this mess when they approved everyone, and now are making it worse by giving nobody any realistic options to re-finance. 6 months ago I told folks that called me to hold on as long as they could to their property. Now I tell them to try for a modification. 6 months from now, I’ll probably just tell them to walk away or “buy and bail.” The banks are getting what they deserve.

    Good stuff as always Mr. M.

  5. “”Now I tell them to try for a modification. 6 months from now, I’ll probably just tell them to walk away or “buy and bail.””

    Why modification?? By the time you get to the point they will talk to you, your credit is already down. Most Mods wont be enough to cover losses already incurred. I am walking now. Bit off a little more than we could chew and have lost over 100k in value. To get me to stay, they would have to throw away my second and discount the first by 60k.
    I know that will never happen, but that is where the market may be headed. Back to where prices are more in line with the economy and rents, and wages. So I would never modify now, and then later when it is down again if you try and modify you can’t and would probably be responsible for income gains on that discount. (just a guess) The faster this happens, the faste the recovery.

  6. “These jumbo prime folks can’t get a new stated loan when their ARM adjusts, and have only ridiculous rate options in the very few options where they qualify full doc.”
    What rates will JUMBO primes reset to ?

    Suppose you have a Jumbo PRIME from 2005. Initial rate 5.625%.
    Reset rate: 12-month LIBOR + 2.25% or 2.5%.

    If rates stay the same as today, what would that reset to … drum roll please … 5.5 to 5.75%
    So, the payment now includes principal and is based on 25 years, so it goes up maybe 20% from their original rate. If one had rented, their rent would likely be 20% higher than it was five years previous.

    Jumbo Prime ARMs that were either IO or fully amortized aren’t the real problem.
    Option ARMS are.

  7. Good point Scooter…that takes care of year one…then what?

  8. Simply unbelievable, a foreclosed home in detroit sold for, get this, ONE DOLLAR!!! http://www.detnews.com/apps/pbcs.dll/article?AID=/20080813/METRO/808130360/&imw=Y

    It was cheaper for the bank to virtually give away the property than to hold onto it. Is this where the real estate market is headed??

  9. Worth taking a look at http://delong.typepad.com/sdj/2008/08/the-second-gild.html , the wealth gap in america has been widening considerably over the 1976-2006 period. The incomes of the top 1% went up a stagering 232% and bottom 90% of households saw their incomes increase by a measly 10%. So much for trickle down economics…

  10. Calculated risk, says bank shadow inventory is no big deal. Interesting.

    Housing: Huge Shadow Inventory?
    by CalculatedRisk

    Sacramento Real Estate Statistics has some excerpts from a Deutsche Bank research report by research analyst Nishu Sood: “An inventory overhang builds in the shadows” (no link)

    Peter Viles at the LA Times covers the story: Bank sees huge “shadow inventory” of foreclosed houses

    This is interesting data, and worth reading the excerpts. In the report, Sood argues: “MLS listings do not fully reflect distressed inventory.” and then he provides some tables (see the above link).

    But it’s not as bad as it first seems. I’ve chatted with Max at Sacramento Real Estate Statistics (thanks Max!), and in the notes, Nishu Sood writes:

    Source: Realtytrac, Housingtracker, Deutsche Bank
    Note: Foreclosure inventory includes pre-foreclosures, auctions and REO. 2/3 of pre-foreclosures are assumed to become foreclosures.
    So these are not all REOs; in fact most of these homes are probably in the foreclosure process.

    Yes, Sood makes a good point – there are many homes not listed that are probably future foreclosures. And I’d add, there are many homeowners waiting for a “better market” to list their homes. So inventory will probably stay elevated for some time.

    But, just to be clear, Sood’s stats are not unlisted REOs held by some bank in the shadows.

  11. “Good point Scooter…that takes care of year one…then what? ”

    Well Dave, typically these loans adjust every 12 months based on the index and margin.

    If rates skyrocket these folks are hosed.
    However, as we have seen, when housing sucks it begins dragging the economy. This (at least in the past few years) leads to a decline in short-term rates. So, you see, if the amount of $ and the number of people affected by ARM resets are significant to the economy, then there is negative feedback impact on short-term interest rates. If the amount of $ and number of people affected by ARM resets is insignificant to the economy, then we shouldn’t worry about their impact should we ?

    Here’s a good rule of thumb on future resets. For every quarter-point increase (annually) it increases the monthly payment by about 4%.
    So, if someone has a 1-year ARM that increases by 2% over a 4-year period, it has the same effect on them as a 4% annual increase in their rent.

    The impact of ARMs in the future depend on three things:
    1. Short-term interest rates
    2. Short-term interest rates
    3. Short-term interest rates

  12. Scooter-

    Of course I am aware that these loans adjust annually…thats why I said what after year one? The one thing that your model lacks is an increase for RISK. That is why jumbo paper is at 3% or more higher than conforming fixed right now. ARMs in the future will certainly be associated with short term rates, but here in California, where a great many folks owe more than the new con-jumbo (after Jan 1) $625K, people with arms are basically screwed. And rents are all over the board here in Los Angeles…and nobody, especially the self-employed, wants to rent and lose the interest tax deduction. Housing does suck, and it is dragging the economy, yet the mainstream media keeps spewing the Wall Street Bulltime propaganda. If the money doesn’t start flowing soon, or the governmanet doesn’t come up with a bailout designed to help to taxpayer, not the bank, then we are all going to be screwed.

  13. […] S&P Goes After Jumbo Prime With Heavy Downgrades […]

  14. […] This all makes sence, however, and was just a matter of time. When values are off 35% in 14 months in the largest Jumbo state int he nation, everything is beginning to look like SubPrime. As a matter of fact, the raters initial grand-slam of the Jumbo Prime and Alt-A universe’s a couple of weeks back looked identical to the flurry of subprime downgrades prior to the Aug/Sept credit market combustion.  I wrote about it on August 12th. […]

  15. […] Comments Mr. Mortgage’s Guide to the TRUTH! on S&P Goes After Jumbo Prime With Heavy DowngradesMr. Mortgage’s Guide to the TRUTH! on Moody’s & Fitch Join S&P in Massive […]

  16. […] S&P Goes After Jumbo Prime With Heavy Downgrades […]

  17. […] to the TRUTH! » Fannie/Freddie’s Survival Spells Big Trouble for Housing Market on S&P Goes After Jumbo Prime With Heavy DowngradesStu on Fannie/Freddie’s Survival Spells Big Trouble for Housing Marketadmin on […]

  18. Did the downgrades make the jumbo rates higher?

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