S&P Cuts Ratings on $34.1 Billion in Alt-A RMBS

Standard & Poor’s Ratings Services said late Wednesday that it had cut its ratings on 1,078 classes from 86 U.S. RMBS Alt-A deals issued in 2006 and 2007 — the latest blow to investors in an already battered mortgage market, and evidence that the nation’s mortgage crisis is moving up the proverbial value chain. In aggregate, the classes with lowered ratings had an original par amount of approximately $34.1 billion, which has been paid down to approximately $28 billion, S&P said. The cuts should hardly be a surprise — S&P had warned in mid-October that it may cut ratings on as much as $351.7 billion of Alt-A securities. A review of affected securities by HousingWire shows that the vast majority of ratings downgrades were previously rated AAA by the rating agency. But perhaps most interesting in the downgrades is this: most of the affected Alt-A transactions are collateralized by fixed-rate and long-reset hybrid mortgages, meaning rated are fixed for five or more years. (2006 and 2007 originations with a long reset would not begin to hit resets until 2011 or so.) S&P said its rating cuts reflect an increased estimate of loss severity of 2006 and 2006 Alt-A hybrids to 40 percent, from a previous 35 percent loss estimate; the bump in expected loss severity reflects S&P’s belief that “further declines in home sales will depress prices further and push loss severities higher than we had previously assumed,” the agency said in a press statement. S&P’s analysts said that as of the Sept. 2008 distribution period, severely delinquent loans for affected transactions average a little over 13 percent of current pool balances — an increase of almost 30 percent in just one quarter. For anyone familiar with Alt-A deals, those should be stunning numbers, worth repeating: more than 13 percent of remaining loans are 90+ delinquent, in foreclosure, or held in REO. This number is so damaging, in particular, because Alt-A transactions were comparatively thin on credit enhancement relative to their subprime counterparts: a weighted average FICO of 700+ had a way of convincing everyone these deals would perform. In addition to the downgrades, S&P said that it did affirm 578 ratings among 89 differeing RMBS deals; a good number of affirmations were on AAA-rated securities, as well. For those curious, click here to see a list of affected individual securities. Write to Paul Jackson at [email protected].