S&P Warns on $351.7 Billion of Alt-A RMBS
Standard & Poor's Ratings Services said Wednesday that it had placed ratings on 5,536 classes from 456 U.S. RBMS transactions backed by Alt-A mortgage collateral issued in 2006 and 2007 on review for likely downgrades. Perhaps most telling is that the mortgages involved aren't short-term resets: S&P said that most of the Alt-A transactions now under review are collateralized by fixed and long-reset hybrids (meaning rates are fixed for five or more years from origination dates). In aggregate, the affected classes represent an original par amount of approximately $351.7 billion; that total is $280.1 billion in current balance. Driving the likely downgrades is yet another update to loss severity projections by the rating agency, which said it now expects average loss severity on affected mortgage deals to be at 40 percent rather than the previous threshold of 25 percent. "Continued foreclosures, distressed sales, an increase in carrying costs for properties in inventory, costs associated with foreclosures, and further declines in home sales will depress prices further and push loss severities higher than we had previously assumed," S&P analysts said in a press statement. Read the statement here (login required). We've noted escalating loss severity numbers on Alt-A transactions in previous reports, relying on data from Clayton Holdings, Inc.; we've even noted that the rise likely meant that S&P would soon need to hike its loss severity assumtions. The rating agency in July upped its loss severity estimates for 2007 hybrid and negative-amortization Alt-A loans to 40 percent; Wednesday's update now puts long-reset hybrids on the same playing field. As of the September 2008 distribution period, S&P noted severely delinquent loans (90-plus days, foreclosures, and REO) for the affected transactions averaged over 13 percent of the current pool balances, which represents a rather astounding increase of 27.6 percent since June 2008. Look for downgrades over the next few weeks. For more information, visit http://www.standardandpoors.com.