S&P Warns -- Again -- on Alt-A First Liens
Standard & Poor's Ratings Services said earlier this week that its ratings on 9,430 classes from 1,077 U.S. first-lien Alt-A RMBS transactions issued in 2005, 2006, and 2007 had been placed on CreditWatch with negative implications -- otherwise translated as "downgrade imminent." The affected classes had an original par amount of approximately $552.83 billion, and have a current principal balance of $445.43 billion, the rating agency said. It's almost becoming a yawner to see more RMBS downgrades, but what they mean should not be lost on any market participant, even if they're increasingly common and the hundreds of billions of dollars involved now seem a numbing figure to most of us covering this mess. A review of the thousands upon thousands of classes by HousingWire shows that roughly half of the at-risk bonds are currently rated AAA by the rating agency; downgrades to securities rated AAA are likely to lead to further write-down pressure for banks and insurers already hard-hit by ratings downgrades. S&P said the ratings warning came on the heels of a Feb. 24 update to the agency's loss severity assumptions for most Alt-A transactions. S&P cited a "belief that the influence of continued foreclosures, distressed sales, an increase in carrying costs for properties in inventory, costs associated with foreclosures, and more declines in home sales may depress prices further and lead loss severities higher than we had previously assumed" on recent Alt-A deals. As of the February 2009 distribution date, severe delinquencies -- 90+ days, foreclosures and REOs -- have accounted for an average of 22.92 percent of current aggregate pool balance for affected transactions, S&P said. And, over the past three months, severe delinquencies in affected deals have risen by a sharp 24.5 percent, illustrating the pressure much of the Alt-A space is now facing. S&P last made major cuts to private-party RMBS deals in early February. Read previous coverage. The bottom line here is this: for all of the pain felt in this area already, plenty of banks large and small are still generally carrying securities on their books at a level justifiable against current ratings levels (how many investor presentations have we seen in recent months touting the percentage of securities held rated AAA?). Would-be buyers know the securities aren’t worth the AAA rating they’ve got, and frankly so too do any would-be sellers, but nobody can sell a security still at AAA at C-level prices, and then justify the hit that so doing would have on the rest of their books. With many of these AAA high-fliers falling officially off their perch, that dynamic appears set to change further. Write to Paul Jackson at firstname.lastname@example.org.