S&P stress tests MBS in junk status
Standard & Poor's applied new stress tests last week to mortgage-backed securities in junk status, showing that some of the bonds are likely to recover only a fraction of the current principal balance. The actions are part of an initiative the credit rating agency began in February to publish projected recoveries on certain MBS rated triple-C, lower or not at all. Some of the bonds were originally rated triple-A. Collateral backing these securities include prime, Alt-A and subprime loans. Last week, S&P updated recovery projections on 8,933 MBS, totaling more than 21,000 securities so far. According to the data, ratings for 8,458 of the MBS were originally at triple-A but as of February many have been lowered to junk status. S&P conducted two separate stress tests, one under "expected" conditions, and another under "stressed" market conditions. Under each scenario, S&P assessed how much of the remaining principal analysts believe the transaction will repay through maturity. According to the data, 156 of the securities updated last week would recover less than 1% of the remaining principal balance – under expected conditions. The number balloons to more than 300 securities if conditions are stressed. One security was issued by a Goldman Sachs (GS) mortgage trust and was originally rated triple-A. Analysts now project the security to recover none of the remaining $250 million in principal under expected conditions, according to the data. However, the security should still earn interest through the duration of the maturity terms, according to S&P credit analyst Timothy Bartl. The hit investors take on the principal depends on how the deal is structured, Bartl said. "We will continue to provide our recovery assessments as collateral performance evolves, and we will comment on trends as we identify them," he said. Write to Jon Prior. Follow him on Twitter @JonAPrior.