S&P Doing the Nasty on $280 Billion in Alt-A…Largest Ever

Posted on October 15th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

S&P remains ahead of the impending Alt-A and Jumbo Prime Implosions with their largest potential downgrade ever. Just to clarify, Alt-A is mostly limited documentation products and the now infamous Pay Option ARM. Jumbo Prime refers to prime loans with amounts over the Fannie/Freddie conforming limits including loans such as the 5/1 Interest Only.  Wells Fargo Bank, Chase, Citi and Wachovia were among the highest volume large-named Jumbo Prime and Alt-A lenders in the nation.

This week, S&P in their largest and most sweeping effort to date, dropped the bomb on Alt-A, the segment leading the mortgage crisis out of the first quarter (subprime) and into the second. However, this action is not necessarily targeted at ARMs and Pay Options, rather “loans with at least five years of fixed rates”, S&P said. This is big news.

This most recent S&P action hit $280 billion and comes just two months following another massive sweep of both Alt-A and Jumbo Prime (see Mr Mortgage report links). $280 billion is approximately 15% of the total Alt-A universe.  I am aware that $280 billion hardly seems like news any longer, but many banks still hold Alt-A and Jumbo Prime MBS/whole loans on balance sheet due to their previous high ratings.

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 or refinanced with cash-out as early as 2003 are now under water and at an exponentially greater risk of default.  In your harder hit areas, prices are at decade lows and those in a negative equity position are the majority.

Even those who purchased much earlier and put a second mortgage on the property may be 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 few months stretching deep into the heart of the ‘Prime’ loan sector. Stay Tuned.

If you have the time, below are links to my most recent Alt-A and Jumbo Prime downgrade stories a couple of months back.  This will give you the full scope of how hard these segments have been hit.– Best Mr Mortgage

S&P Reviews $280.1 Billion of Alt-A Mortgage Debt (Update1)
Oct. 15 (Bloomberg) By Jody Shenn

Story Highlights

Standard & Poor’s said it may downgrade $280.1 billion of Alt-A mortgage securities, the most that the ratings company has identified in a single announcement.

S&P has boosted estimates for losses on each foreclosure on Alt-A loans with at least five years of fixed rates to 40 percent, from 35 percent.

Securities downgrades may boost the capital needs of holders such as banks and insurers, and force some investors to sell debt.

“There has been a persistent rise in the level of delinquencies among the Alt-A mortgage loans supporting these transactions,”

Foreclosures, Distressed Sales

Loans at least 90 days late today totaled 13.1 percent of the balances as of September, up 27.6 percent from June.

Loss severities will be higher because property prices will probably fall further.

Ratings companies downgraded about $118 billion of prime- jumbo and Alt-A bonds last month, including $90 billion of top- rated debt.

On Oct. 6, Moody’s Investors Service put $110 billion of prime-jumbo mortgage securities under review for downgrades.

33 Responses to “S&P Doing the Nasty on $280 Billion in Alt-A…Largest Ever”

  1. It’s gonna get really wierd from here on out.

  2. A Question: Derivatives are stated to be at around 54 to 55 trillion, are those numbers for just subprime and Alt A derivatives or do they include Jumbo prime and commercial loans?

  3. EU leaders called for a global summit as soon as next month to rewrite the 1944 Bretton Woods accord that paved the way for Europe’s post-World War II reconstruction and set up the institutions that oversee the world economy today.

    “We had the emerging market crisis, we had the Internet bubble, now we have this massive crisis,” French President Nicolas Sarkozy told reporters after chairing the first session of an EU summit late yesterday in Brussels. Europe insists on the “re-foundation of the international financial system.”


  4. A friend got a 10/1 Interest Only loan in San Carlos (Bay Area) in October 2005 and the amount they financed is over the new conforming limits ($750k). Does this make their mortgage a Jumbo Prime? It seems to me they have huge interest rate risk upon their recast.

  5. Correction to last post — October 2006

  6. It should come as no surprise whatsoever that people who bought homes with good credit ratings are becoming more and more willing to default on their current mortgages. Especially in CA, where there is nothing that can be done to someone who walks from a non-recourse loan, it Just makes good business sense to leave a severely depreciated asset in order to regain some control of their finances. The 0% down purchases gave buyers the opportunity to leverage hundreds of thousands of the bank’s dollars with virtually no financial risk to themselves. If the value of the property went up, they could sell and make a profit. If the value plummeted, they could stop paying, live rent free for upwards of a year, and walk away for no money. I understand this severely damages their credit, but they will walk from their homes with ~ $25k in their pockets and shouldn’t need to use credit anyways. To me, this is a better “starting over” plan than bankruptcy. The old addage “if you can’t beat ’em, join ’em” has never been so true. The people who really stand to get screwed here are those who are killing themselves month to month, exhausting their savings and running up credit cards to maintain their “moral obligation” to their mortgage company. The golden rule, “treat others as you would have them treat you” is now coming back to bite banks in the a$$ as they have never cared about what is right and wrong when it comes to borrowers, only what impact each situation has on their bottom line. Now that individuals and families are taking action based on their bottom line, the $h!t is hitting the proverbial fan.

  7. Partyboy, you said something interesting:

    “I understand this severely damages their credit, but they will walk from their homes with ~ $25k in their pockets and shouldn’t need to use credit anyways”

    With credit being so tight now, they would most likely not qualify for credit anyway so really when you break it down what is the difference? In 4 years their credit is restored anyway and it will take that long before things correct.

    A) Good credit rating but limited or even no access to much needed credit due to your circumstances of being under water on your home by $100,000.00 or most likely in CA. by much more than that. No savings, paying for a depreciating asset, risking foreclosure, so you are basically stuck and going no where for years to come.

    B) Bad credit rating and limited or no access to credit which is now not needed due to living free for a full year and getting out from under this giant weight of debt hanging over you crushing your ability to save and / or get ahead. Also you can then go rent the same place for half the cost and be way ahead of the game. No longer paying for a depreciating asset, Foreclosed upon but who cares when you really look at things logically, no longer stuck for years to come and that giant weight is now lifted off of your shoulders.

    To me this decision is a no brainer to anyone in it. I suppose you could sign up for one of those Government Assistance Programs (wink… wink…) and spread your loan out another 10 years and make it full recourse so that you are a debt slave for the rest of your life. That is an option too… NOT!!!

  8. Partyboy,

    The problem with people waking up and shafting the banks is that our government has stepped in with our taxes. In reality “jingle mail” is shafting US and our posterity.

    We need to wake and demand rule of law. The executives behind the Lenders, I-banks, S&P, Moodys, Fitch should be removed from office and disgorged. Many people/homeowners would have never thought of mailing in keys when they could afford the payments, but add in heavy doses of moral hazard and now it is a prudent decision. Likewise others would have never have dreamed of committing crimes, but clearly our government is sending a clear message that crimes pay as long as it is white collar.

    Decades of proven safe and sound lending guidelines were abandoned for self-enrichment. These people have committed fraud on a massive scale and should be held accountable.

    What help is the gvt providing for all the pension funds who were destroyed/devastated? Many of these people may have been completely wiped out because of the reckless ratings. NSRSOs status should be revolked for Moodys, S&P & Fitch. These people had Enron rated as investment grade 5 days before Enron went belly-up.

  9. MB, while all of that is true it is really irrelevant. People are not going to jail and nobody is being held accountable. These facts just exacerbate the willingness to walk away. If the Government doesn’t care then why should we? The Government is bailing out banks, buying Insurance companies and purchasing homes fro crying out loud. What good does that do the American Tax Payer who is paying for all of this mind you? Why should millions upon millions of people willingly get screwed by staying in these homes when nobody will be there to help them afterwards? By leaving they are helping themselves and that is a lot more than they can count on than from Uncle Sam. This Government by their own actions has said loud, and clear to anyone listening. You are on your own people. It is every man, woman and child for themselves now. If you want to be saved then save yourself because we are not going to worry about you.

    If you don’t believe me then just ask the 3 million plus that have been foreclosed on already in the past year and a half. Just ask the 700,000 plus unemployed the same question. Ask the 10’s of thousands who are no longer collecting because their benefits ran out and the Government is too busy bailing out their buddies than creating jobs and throwing money at CEO’s rather than extending the benefits for these people who can’t find new jobs as a result. Ask the people living in tent cities all across the country what they think of all of this. Ask the people who lost their pensions and finally ask yourself why you wouldn’t walk away if you were currently in their situation. I know I wouldn’t even think twice and would have been long gone already given the scenario above…

  10. People think I am mad – but I am seriously thinking that a keep the house you in doctrine would re-invent the American economy. You renting, you paying off the debt – if you live there or run a business from there the house / office is yours.

    What would this do – it would kill the financial system as we know it – wipe out pension funds etc. The pension system is a farce anyway – there is no money left in pension funds. The financial system is a farce – the reserve rate is less then 10% for goodness sake.

    So you would be left with two issues – reinvent the banking system. Pay pensions from government coffers.

    Please tell me what the difference is between taking company profits to pay pensioners before tax or paying the tax and then paying the pensioners with the money.

    Why do I think this plan could work. You would have 100% of the people not having to think about paying mortgages or rent each month. A new investment bank could be created to get companies running again – companies who would no longer have to pay rental space. Hell the government is on the way to owning them all anyway.

    You in fact create an instant middle class. You need to though Scrap the capital gains tax to preserve the middle class.

    Is this redistribution of capital – of course it is. Who would it hurt – probably 3% of society who own the rental properties.

    How would you get entrepreneurs going again. For the first time in 20 years loans from the central investment bank would be based on business plans again and not only available to the few. The concept of getting money based on a business plan went out the window 20 years ago and killed the American dream for the little guy.

    This Idea is crazy sure – would it work – I’m begining to think so. Would it destroy class structure as we know it today – absolutely. Would it create the biggest middle class in history – absolutely !

    Tell me what you think ?

  11. Wake up people. Most of these discussions presume one family, one house, making a should “I pay the mtg, or keep the plastic current” decision. The reality is more like, multiple party, multiple false identities, “how much more can we milk out of these suckers?” thinking. The con game isn’t just at the top of the pyramid – plenty of people are milking it at the base. If a country can’t/won’t control its’ physical borders – should you expect it to be able to control the borders of prudent finance? Wake up!

  12. Wow this is significant news.

    To answer silvie’s questions, subprime/alt-a/jumbo prime/prime loans were all mixed together in derivative bonds when sold to investors. I have read that globally there are anywhere between $15-40 trillion in derivative time bombs floating around the world. We do not know the exact number, but since we’re talking about $200+ billion that could be downgraded, this could be another extremely painful blow to the global financial system.

    What concerns me the most about this is not just the derivative bonds that were sold, but the credit default swap bets that were made on these bonds. A downgrade would no doubt trigger some counter parties of the CDS bets to pay up and would contribute the the deteriorating financial system.

    If this downgrade occurs and sets off a chain of events with the CDS market and the derivative bonds, the consequences of these events would no doubt keep LIBOR rates very high which will inturn force more people to foreclose.

    I can’t believe this is happening to our financial markets.

  13. Mish, I think you are thinking outside the box and that is a good thing!!! We need to start coming up with new ideas and approaches to not only solve the mess we are in, but to assure it doesn’t happen again or at least in the same manner. As far as your idea… well it does need quite a bit of work to be sure. Is it plausible to do something so radical? I don’t think so in its current form, but perhaps an approach that does keep people in their homes would work. They would have to pay for them however…

    More than likely the loop hole to walk will be closed sometime soon. It would have already been done but the Gov is worried people won’t buy homes in this climate if they are recourse loans. I sure as heck wouldn’t… would you? Down the line the option will certainly disappear at some point however.

    Scary times…

  14. Mish, you make some interesting suggestions, however I am nowhere near knowledgeable enough on macroeconomics to comment on whether or not it would be a good idea. But I do agree that the govt will need to do something drastic to bail out homeowners. I don’t like the idea of people who pay their affordable mortgage getting nothing out of this deal, so I would like to see them get a 2x tax write off for property taxes and mortgage interest. Make that last 5 years or so. This would not only reward responsible owners for helping to keep the market marginally functional, but it would entice people on the verge of walking away from actually doing it. I pay ~ $35000 a year in interest and prop tax. If that was bumped to $70k in income tax write offs, I would definately stay in my home. I would also like to see the money from this bailout plan that is going to various financial institutions be distributed proportionately based on the number of performing loans they have. If banks have acted irresponsibly in the past, odds are they will do it again. So give the most money to the most responsible lenders and have them take over the less reputable institutions. Any loan that the lenders reduce principal on should be subject to a govt payment, not just a profit sharing when the house is sold, but a portion of the interest each month should be paid by the lender to the govt. This would help to make up the govt revenue lost due to the increased tax break for paying homeowners. In addition, anyone who utilizes the govt modification service should not be allowed to write off mortgage interest and property taxes for 10 years as well. These are just some random ideas to balance the benefits to everyone and share the pain amongst those who deserve it.

  15. Another thing, why are property taxes based on the “value” of a home? Don’t we all pretty much use the PD, FD, streets, parks, etc. the same amount? If anything, people with school age children should pay slightly more to pay for the schools and teachers since they are the only ones who use them? To me, the property tax system is one of the most screwed up systems in our country…well, at least in socal. I got my house appraised in the high 400k by the county tax assessor. Purchase price was just over 500k in Jan 07. There has only been one home in our entire subdivision which has sold for more than my “value” this year and it is 1300 sq ft larger on a lot 3x the size of mine. I submitted an appeal showing copious amounts of information indicating that my home was worth ~ 275k and got told to piss off. Sorry to vent like this, but I really despise our local govt.

  16. Stu – I think you’ve made a strong case for what’s in store for 2009. But I think many people are realizing that the lenders dont want to foreclose because that would expose their weakness. Since they are marking to myth right now and foreclosures would ruin that. So people are going to stop paying their mortgage and stay in the house. I’m starting to hear this more and more.


    Now lenders are not selling properties at 50 cents on the dollar because they are hoping the Government will now buy them at 80 cents on the dollar!!


    How can our goverment think that the solution is keeping housing prices propped up??!! As Peter Schiff says–AMERICANS ARE BROKE, and until house prices come back into line with historical fundamentals, IT WILL NOT MAKE SENSE TO BUY!!!
    Also, with mortgage rates now rising, how the world will they move houses??

    Makes NOOOOOO Sense.

  18. Indeed, people are and will continue to simply ‘walk-away’. This practice is likely to accelerate in the days & weeks ahead.

    The question however remains: When anybody walks away from anything, something must inevitably fill the void. Whether it be a bank failure or a home owner foreclosure. Problem is, what steps into the lurch is something we may not want – that being more Government.

    Sure, the institutions will preserve some of their capital and upper mgmt. job security with a bailout and sure, the ex-home owner can walk away into a rental and save part of his financial future – perhaps even as some have mentioned here, jump back in the credit river in a few years, assuming a free market still exists.

    In the meantime, someone somewhere will have to pay and endure pain. If it isn’t the individual, it will be all of us at the expense of Liberty. We’ve been conditioned though, that pain is something we are not to endure – at any expense. The government is there to make sure of that. Their only recompense of course, is that they nationalize everything – and pretty soon, You as well.

    Peace –


  19. CC, I am very, very happy that you brought this up (that being more Government)!!
    This is the central point in my theme of:


    You see the point of which you make is critical to this entire process of re-defining America. We MUST rid ourselves of the empty suits and talking heads of this current Government that no longer represents “We the People” and they must be replaced with brave NEW leaders that are nipping at the same old, same old crowd that exist in Washington today. These NEW leaders will be beholden to the movement for TRUE CHANGE because if they don’t they will be gone in the following election. Nobody wants to loose their job… trust me! This job especially being so prestigious and all.

    WE CAN make a difference and WE WILL if we get enough of us to vote to make that difference. ONE DAY and ONE VOTE can change everything we have been bitching about and frustrated about over the past decade or more. Think about that for a minute… ONE little vote on ONE significant day can change the world you live in by TAKING BACK CONTROL of OUR GOVERNMENT!!!

    Someone should make a bumper sticker “ONE DAY & ONE VOTE”

    Folks this is really simple to be quite honest. You stand still and do nothing and literally get ran over, or you stand up and fight!!! Please vote this election for either party and do it because it makes sense and means something!!!

  20. “Thank You” Mr. Mortgage!!!

    I must take the time to say thanks for allowing me to post my opinions on your website. I truly appreciate the work that you do and equally respect that you allow for others to not only share in the value of your work, but critique it as well if they so choose. Most importantly I value so much the ability to speak freely on your website about my own personal views and ideals in relationship to your own personal work.

    So thanks again for having this website, the privilege to share and the fantastic work that you do and so graciously share with us all!!!


  21. No Stu – thank you for continuous contributions…over and over and over again. Just kidding. You are a real asset to the blog. Just keep it clean and no mortgage broker jokes.

  22. Stu rocks…Mr. Mortgage’s first shining star!

  23. Front page of Washington Post reports homes in Prince William County, a suburb in the Washington, DC area are selling at drastically reduced prices. Single family homes around $100,000 and townhouses at $70,000. Seems to me that this drags down the property values and then more people are upside down in their mortgage. And they walk away, the home is foreclosed on, and the cycle starts over.

  24. I am still waiting here on this fence waiting for the firesale. Be it the government or the banks it will come.

  25. Well it’s about time that the S&P is downgrading this junk. Here’s to the downgrades to come on the rest of it!

    I’m just going to curl up in my corner here and fantasize about the Glass-Seagle Act being reinstated, the trillions of bailout money being repaid to the taxpayers and our three branches of gov’t reading a few blogs and getting a clue about what is really going on. Yep. I’m done with reality for the day. Phooey.

  26. Looking at all the options, walking seems to be best and increases your chances of coming out ahead of all of this. Further if/when you finally do start paying rent it would be to a local landlord and the additional money you have to spend will be local as well. Might as well support the local economy that needs the badly needed funds and business than sending a house payment that ends up who knows where.

    The best option for turning CA around is freeing up money from overblown house payments. Let the rest of the nation bail out CA loans and keep your CA rent monies local. Best of both worlds.

  27. Congress has said that those who walk away are not subject to taxes on loan forgiveness.

    Lenders in California now have extra hurdels before sending out the nasty Notice Of Default.

    The hundreds of Mortgage Loan Brokers who have collapsed, put their loan docs in the dumpster.

    The Wall Street firms who packaged the loans into CDOs cared not for a proper paper trail.

    The Wall Street firms who sold Credit Default Swaps did not care if you held an ownership stake in the underlying debt instrament they where giving you a non-regulated insurance policy on.

    Judges have ruled that if you cannot prove that you have the mortgage, you cannot foreclose.

    BOTTOM LINE: If you paid $500,000.00 for a $250,000 house and did not put 20% down, why are you making mortgage payments? It can make sense to pay your taxes and insurance, but to make your mortgage payments makes is not rational.

    THIS IS THE ROOT OF THE PROBLEM. With declining home prices, which should decline, rational mortgagees will default.

    For every homeowner who is offered a renegotiation, in most cases it is better to default.

    Unless, we make ‘loan forgiveness’ taxable, we will continue to see many more foreclosures.

    Will we change the current state? No way. Thus, home prices will continue to decline and no bottom will be seen before 2011.

  28. Kudo’s to you Stu and Mr.Mortgage
    To break down the current state of affairs that we now face it all boils down to one word…confidence (trust)..I guess thats two words but you get what I mean. This isn’t about liquidity and how much money we can throw at this and that. The current administration, the banks and other lenders have no way of knowing how to value the garbage on the books they call “assets”. There is no trust between the lenders as they do not have a clue as to how healthy the balance sheets really are and most importantly if the people they are lending to will have the ability to repay. As this blog understands, this is happening on a global scale not just in America. uclaztec’s post points out that there is genuine concern that a major dislocation in the CDS markets will occur. I totally agree. Mish..you make way too much sense, I wish you were running the show!
    Bottom line, the deception and putting off telling the truth about balance sheets continues… the FED hasn’t learned a thing..have they? Until we have confidence restored to the markets,(not more money sloshing around) the steady deterioration of the financial system including housing will continue. Sorry Mr.Mortgage, as this rant got off topic.

  29. I have been in the mortgage business for over 14 years. This market is crazy. Until the lenders wake up and make common sense calls then we will not get out of this anytime soon. We are at least 18 months before hitting bottom. Why doesnt fannie and freddie get together with some people on the streets and say what would work to get this housing market flow again. I have a whole bunch of easy ideas. How could i ever get a meeting with anyone important. Never! I was going to try last week then i just laughed. seriously some of this is easy and some is really tough but so much could be done to help. I would be willing to spend my own money to go and help out but they are all in tunnel vision right now.

  30. To stu re 7pm on the 16th

    You know, the vote-em-all-out Party.

    “”Permit me to create and control the nation’s money and I care not who makes its laws”” – banker Baron Meyer Rothchild.

    The worst thing the government has done to create the mess we’re in was to delegate the people’s sovereign, Constitutional power to create their own “money” system to the private banking cabal known as the federal reserve bankers.

    They are the ones who have masterminded this gargantuan debt-money screw up, disempowering American workers and ballooning the debt of our nation’s taxpayers.

    So, unless you are going to throw-em-all-out with a view to putting the people back in charge of their money system, well, it’s like the Baron said.
    It matters not.

    Regarding Mish’s earlier observations and suggestions, first, I think the actual “reserve” ratio is more like 2 percent on all that leverage out there.

    And, meantime, the government keeps on adding more taxpayer debt to the pile at a rate of around a hundred BILLION a month.
    This being done through the money-creating powers of the private bankers, by the way.
    That’s who we will owe this debt to in the end.

    Finally, the idea of direct government payments for things like government-sponsored pensions and social security – no problem there.

    A re-writing of the law to make government-issue credits “legal tender” in this country creates a direct path from taxpyer to taxpayer.

    Do not pass Wall Street.
    Go directly to Main Street.
    One “get-out-of-jail-card” FREE to the non-bankers among us.

    Monetary reform.

    Or else, begin it all over again.

  31. Joebhed, it matters plenty my friend… Change takes time, but you need to start somewhere. By voting them all out we start with a clean slate. The people you speak of looking over our finances are appointed. In the current situation they are past Wall Street invesment house leaders, but done right in the future that may and should not be the case. We need to stress unbiased people in these positions and perhaps even more oversight demanded for these very offices. Some have suggested abolishing them all together and that too may be a viable answer for change. The point here is with new people in office we can direct this change and improvement with no good old boy network to rally against it. With the same old, same old crowd gone we have decisions being made for the good of its people and country rather than for what is owed because of some past favor or promise given.

    I see deals being made all of the time in Washington that are a direct result of having career politicians (a great reason for term limits by the way). These deals are called pork and one needs to look no further than the rewritten $700 Billion Bail Out Plan to see how it works. When the good old boy network of bought and paid for career politicians realized they didn’t have the needed votes to Bail Out their banking buddies and largest political contributors, they simply rewrote the bill. To make up the difference in votes needed they added $125 Billion in pork to various states that were targeted at people on the fence or who may decide to vote no. This added pork now compells these deal stoppers to go along to get along and with something to bring home to the people of their states in hopes of not getting backlash for them voting for this bill.

    The people were clearly and overwhelmingly opposed to this bill and for good reason. The people know they are the ones paying for this give away and also the ones that would get nothing from this Bail Out. For our supposed representatives to vote for it anyway was a literal slap in our faces. That should not be tolerated by the voters and tax payers in this country… ever!!!

    So we start with change to the most seriously broken part of our government, which is without question career politicians. Once this is accomplished we can start calling for further change and have people actually listen to these ideas. The Fed either abolished or with significantly less power will be first on the agenda to be certain, but do you really, honestly think we even have any chance of accomplishing that without first cleaning out the idiots that enabled it to happen in the first place. We have people like Frank and Dodd making decisions on our countries financial future for crying out loud. I wouldn’t even take directions from them on how to get to the nearest gas station let along lead me anywhere!!! They are both a joke and a symbol of what is wrong in Government today. They and their cronies must go and now is the time!!!

  32. ONE DAY – ONE VOTE!!!

  33. It’d be nice for a list of all the congress thieves that voted “yes” on the failout plan to be published a couple of days before the election. That way, it’s fresh in our minds who to vote against.

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