Jumbo-Prime Under Attack by the Raters – Big Banks Beware

Posted on August 28th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

More news for you on the Jumbo-Prime and Alt-A front.  The recent flurry of action by the raters is almost too much to keep up with. In the past month, all three primary ratings agencies have torn apart the Jumbo Prime and Alt-A RMBS market.  Now Moody’s is going one step further by stepping up scrutiny, which means more downgrades shortly, on ALL Jumbo Prime deals from 2006-2007.

This is simply because Jumbo Prime delinquencies are surging and the raters can’t be caught flat-footed on this implosion. While subprime delinquencies jumped 25% from January to June 2008, Jumbo Prime delinquencies rose 72%.

Moody’s Reviewing All 2006, 2007 Jumbo Mortgage Bonds (Update1) By Jody Shenn

Aug. 27 (Bloomberg) — Moody’s Investors Service is stepping up scrutiny of all prime-jumbo mortgage securities issued in 2006 and 2007 as the surge in U.S. foreclosures spreads beyond subprime loans.

Moody’s is studying its rankings on the securities after late payments started increasing more quickly in recent months, according to a statement today from the New York-based ratings company. The bonds aren’t all under formal reviews for downgrades, said Thomas Lemmon, a spokesman.

Defaults among homeowners “across the credit spectrum” have soared as home prices slump, mortgage rates rise and lenders rein in debt offerings, Moody’s said. “Serious delinquencies” for prime-jumbo loans in securities rose 72 percent between January and June to 1.7 percent of balances, from 1 percent, according to Moody’s.

“In contrast, subprime delinquencies, though much higher, rose 25 percent over the same period, increasing from 25.2 percent to 31.5 percent,” Peter McNally, a Moody’s analyst, wrote in a related report.

Just Friday of last week, S&P reported that Jumbo Prime and Alt-A are under heavy pressure with massive month-over-month default rates surging.  These classes of borrowers and loans are highly susceptible to the negative-equity influences that are the leading cause for loan default among all paper grades.

This is a major problem very few are factoring in when forecasting future events the housing market. Everyone thinks ‘subprime and done’. Nope! Subprime was the proverbial ‘canary in the coal mine’ to the great housing and mortgage implosion. 

Total delinquencies on prime “jumbo” loans and “Alt-A” loans made in 2007 rose at a 7.3 percent and 9.12 percent rate, respectively, from June, the rating company said. These loans require less proof of repayment but were made to borrowers with credit scores above subprime. For subprimeloans, the rate of delinquency rose 7.0 percent rate last month.”

Overall, delinquencies on 2007 prime jumbo loans rose to 3.22 percent in July, while Alt-A loan delinquencies increased to 14.56 percent, S&P said. Defaults on subprime loans from last year hit 31.25 percent.

This s very worisome for our nation’s banks. Somehow everyone became fixated with the sexy sounding ‘CDO’ and forgot all about the whole loan and MBS exposure still on bank’s balance sheets, much of it ‘at-risk’ but not labeled or valued as such.

Not everything was ’sold and securitized’.  Far from it. Higher yielding paper such as higher rated Alt-A including Pay Option ARMs and HELOC’s were among the favorites for some.  Other’s who were trying to be more responsible thought that holding onto Jumbo Prime for investment was a great game plan.  In retrospect, it was a bad plan but in many cases, especially with higher-rated Jumbo Prime, it seemed ’safe’ at the time. 

The Jumbo Prime and Alt-A exposure on many of the nation’s leading bank’s books is significant. Much of this is still marked at face or a very liberal model based upon a ‘Prime’ paper grade or ‘Investment Grade’ credit rating. The largest holders of Jumbo-Prime are Wells Fargo, CITI, Chase, BofA, WaMu, Wachovia, SunTrust among others and in addition to various investment banks. 

This all makes sense, 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.

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.

Thornburg has already shown signs of Jumbo-Prime and Alt-A downgrade pain, announcing a size able margin call last week. This is simply the after-effect of these downgrades. Thornburg getting a margin call can be viewed as equivalent to a bank taking a write-down on similar paper. The fish has swam upstream to higher grade mortgage loans. The negative-equity effect is alive and well across all borrower types.

In my opinion this is the first sign of things that are headed towards the nation’s largest banks holding the most whole loans and MBS’.  The Jumbo Prime and Alt-A exposure on many of the nation’s leading bank’s books is significant. Much of this is still marked at face or a very liberal model based upon a ‘Prime’ paper grade or ‘Investment Grade’ credit rating. 

And remember, most of Thornburg’s  Jumbo Prime is of much higher quality that most of what Wells Fargo, CITI, Chase, WaMu, SunTrust, First Horizon or Lehman were originating during the bubble years.

Finally, Home Equity Lines/Loansare a major problem for banks. Their exposure is massive. For example, Wells Fargo owns $84 BILLION of these. Moody’s also upped their loss projection for this loan type. Nothing here can be viewed as anything but long lasting pressure on our nation’s largest banks, which will lead to contraction in lending and further pressure on the housing market in the future. -Best, Mr Mortgage

Home-Equity Loans

Moody’s also projected losses on prime home-equity loans and lines of credit underlying securities. Most of those bonds are insured, the report said.

Losses on prime non-revolving home-equity loans, also called second mortgages, packaged into 2007 bonds will rise to 17 percent on average, the report said. For 2006 bonds, losses will rise to 13 percent, while for 2005 securities they will climb to 6 percent, Moody’s said.

For home-equity lines of credit, or HELOCs, in 2007 bonds, losses will rise to 26 percent, Moody’s said. Losses on HELOCs in 2006 securities will increase to 24 percent, while losses for 2005 “vintage” bonds will reach 9 percent, Moody’s said.

Other Related Mr Mortgage Research

S&P Goes After Jumbo Prime With Heavy Downgrades

Prime and Alt-A Defaults Surge, Says S&P

Pay Option ARMs – Up to 48% Default Rate

Moody’s and Fitch Join S&P in Massive Jumbo Prime and Alt-A Downgrade Avalanche


One Response to “Jumbo-Prime Under Attack by the Raters – Big Banks Beware”

  1. jumbo loans, equity loans, alt-a loans are in danegr too.

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