S&P Revises Most U.S. RMBS Loss Assumptions, Again

Never has a “we told you so” felt less fulfilling. Starting in May, we began suggesting that Standard & Poor’s Ratings Services’ estimates of loss severity were looking too conservative relative to observed loss levels; it was a stance we reiterated in mid-June, as well. On Wednesday, the rating agency capitulated, saying it had modified both its method for projecting lifetime losses and its loss severity assumptions for U.S. subprime, prime jumbo, and Alt-A RMBS transactions. “Earlier this month, we affirmed our loss assumptions for the U.S. RMBS 2006 vintage, and we projected that house prices would decline an additional 10% by June 2009,” said Standard & Poor’s credit analyst Frank Parisi. “Now, however, we believe that the influence of continued foreclosures, distressed sales, the increase in carrying costs for properties in inventory, the costs associated with foreclosures, and more declines in home sales will depress prices further and lead loss severities higher than we had previously assumed.” S&P said it had increased expected loss projections for 2006 subprime RMBS to 23 percent from 19 percent; early 2007 subprime deals saw expected losses pushed out to 27 percent from previous assumptions of 23 percent. On short-reset hybrid Alt-A loans, total losses are now expected to reach 12.2 percent — almost double S&P’s earlier estimate of 6.3 percent. Early 2007 originations saw loss projections jump to 15 percent from 7.5 percent, as well. 2007 vintage option ARMs are now expected to produce a loss cumulative loss rate of 14.8 percent, instead of the 8.8 percent that had previously been projected, S&P said. Cue more write-downs, more losses The change in loss assumptions invariably means more losses for investors as numerous deals now face the specter of further downgrades. On Tuesday, for example, S&P said it had placed 1,614 ratings on 187 U.S. RMBS transactions backed by U.S. first-lien Alt-A mortgage collateral issued during 2005, 2006, and 2007 on CreditWatch with negative implications. All told, the affected classes represented an original par amount of approximately $56.82 billion. As of the June 2008 distribution, S&P said that severely delinquent loans (90-plus days, foreclosures, and REOs) for the affected transactions made up an average 17.85 percent of the current pool balances. Over the past three months, severe delinquencies had increased by an astounding 28.70 percent, underscoring just how bad things are getting in Alt-A and just how fast it’s taking place. Most importantly, S&P said it had raised loss severity assumptions for 2006 and 2007 Alt-A hybrid and negative-amortization transactions to 40 percent from 35 percent. That assumption may yet prove to be too conservative relative to the loss numbers we’ve been seeing recently; but that’s an issue we’ll cover in a separate story with updated statistics. S&P’s updated assumptions weren’t just limited to first lien pools — the rating agency also updated its loss assumptions for 2005-2007 vintage U.S. HELOC RMBS deals on Tuesday, and the picture wasn’t exactly pretty: for 2007 deals, the loss ranges span from 1.49 to 74.44 percent with an average estimate of 37.89 in cumulative losses. For 2006 deals, the cumulative loss expectation is slightly better, but still eye-opening: 22.62. If you weren’t sour on second liens yet — most existing loans in this area haven’t yet begun to exhibit the default patterns close to such huge loss estimates — it may be time for you to get there. (Unless, of course, you’re content to accept a 10 percent hike in dividend payout as proof that seconds won’t be a problem.)

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