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.
- Moody’s & Fitch Join S&P in Massive Alt-A RMBS Downgrade Avalanche
- S&P Does Hatchet Job on Thousands of Prime, Alt-A and Subprime RMBS
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
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