S&P Axes $41 Billion in Alt-A RMBS, Warns on More AAA Cuts Ahead
The latest round of RMBS downgrades continued in full swing late Tuesday, as Standard & Poor's Ratings Services said it had cut ratings on 2,138 classes of Alt-A RMBS form the 2006 vintage. The move came as the rating agency updated its loss assumptions on Alt-A loans, affecting more than $41 billion in issuance volume, or 6.1 percent of the par amount for the 2006 vintage. The agency also placed 487 AAA-rated Alt-A tranches on review for a future downgrade, it said. "Due to current market conditions, we are assuming that it will take approximately 15 months to liquidate loans in foreclosure and approximately eight months to liquidate loans categorized as real estate owned," S&P said in a press statement explaining the downgrades. The agency also said it assumed loss severity of 34 to 35 percent, depending on whether the transactions in question are backed by option ARM collateral; sources suggested to HW that the severity estimates may actually prove to be far too conservative. For example, Clayton Holdings, Inc. (CLAY) reported in late March that average loss severity observed on Alt-A first liens was nearly 37 percent (and increasing). S&P said it is projecting lifetime losses ranging from a low of 4 percent of original balance for fixed and long-reset collateral to a high of 7.5 percent of original balance for Option ARM transactions. The majority of Tuesday's rating cuts, on a dollar volume basis, were centered in AAA and AA-rated tranches -- 8.09 percent and 5.86 percent of affected tranches, respectively, according to S&P. The rating agency did not disclose to the media specific deals cut or how far some of the former AAA-rated tranches were downgraded. The cuts at S&P come on the heels of aggressive Alt-A downgrades at rival rating agency Moody's Investors Service last week, as reported by Housing Wire. Moody's began cutting Aaa-rated tranches and also issued a warning on hundreds more top-rated classes within Alt-A on April 24. For more information, visit http://www.standardandpoors.com.