S&P Stops Rating Home Equity RMBS; Cites "Anomalous" Borrower Behavior
Standard & Poor's Rating Services on Thursday did something that very few market participants expected: the agency said it would stop rating RMBS backed by so-called closed-end seconds altogether, whether prime or subprime. Home-equity loans, as closed-end seconds are more commonly referred to outside the Street, were a huge part of the recent housing market run-up. HELs were a huge boost to consumer spending during the housing boom, and also made it possible for many homeowners to skirt private mortgage insurance by piggy-backing a second lien that covered up to 20 percent of a home's purchase price. "After reviewing and analyzing the performance data available for U.S. closed-end second-lien (CES) mortgage loans and the related residential mortgage-backed securities (RMBS), Standard & Poor's Ratings Services believes that this market segment does not allow for a meaningful analysis of new issuance and securitization," the agency said in a press statement late Thursday. No kidding. Most second lien holders finding loss severity to be at least 100 percent, if not greater. And with price declines showing no sign of letting up, S&P said that an "unprecedented level of loan performance deterioration" has essentially made it impossible to rate second-lien RMBS going forward. Apparently, there simply isn't enough credit enhancement in the world to account for losses that reach that high -- and while S&P said it will continue surveillance on existing CES deals, sources said that S&P's announcement underscores just how heavy losses really are in an area of mortgage finance that was once among the industry's hottest. How hot? Consider that S&P rated nearly $18 billion in CES deals druing 2007 alone. Investment Dealers' Digest, which interviewed S&P spokesperson Adam Tempkin, noted that S&P is seeing borrower behavior that Tempkin characterized as "anomolous and unprecendented" -- a reference to a growing number of borrowers simply walking away from their homes. Neither Moody's Investors Service nor Fitch Ratings responded immediately to a question from HW regarding whether each competing agency intends to follow suit. Regardless, sources told HW that the move by S&P essentially puts the nail in the coffin for much of the home equity loan marketplace, and comes as many banks are tightening the screws on outstanding HELOCs, as well. "The home ATM is officially out of cash, and has been for some time," said one source, a bond analyst who asked not to be identified by name. For more information, visit http://www.standardandpoors.com.