S&P Lowers the Boom on 1,326 Alt-A RMBS Classes

Bring on the Alt-A downgrades: Standard & Poor’s Rating Services said Wednesday evening that it had slashed the ratings of 1,326 Alt-A residential mortgage-backed securities, after recent data is proving performance of Alt-A loans originated in 2006 and 2007 to be particularly problematic. The downgrades affect $33.95 billion in issuance value and affect Alt-A loan pools securitized in the first half of 2007 — roughly 14 percent of S&P’s entire Alt-A universe in that timeframe. Perhaps more telling were an additional 567 other Alt-A classes put on negative credit watch by the ratings agency. A review of affected securities by Housing Wire found that all of the classes put on watch for a pending downgrade are currently rated AAA, suggesting that S&P’s confidence in thin overcollateralization typical of most Alt-A deals is quickly waning. The total dollar of potential downgrades to the AAA classes in question would dwarf Wednesday’s downgrades, which affected only mezzanine and equity tranches. Driving the downgrades are increasingly poor performance in Alt-A collateral; Housing Wire covered some of the key metrics in recent vintages in an earlier report, which found that 2007 vintage Alt-A loans saw severe delinquencies jump nearly 30 percent between March and April alone. Beyond poor collateral performance — the sheer number of foreclosures in the pipeline and associated REO inventory growth — it now looks like difficulty disposing of assets is proving problematic as well from a loss perspective. S&P said that it now assumes that foreclosures will take 15 months to process, and REO disposition another eight months on top of that, citing “current market conditions.” Sales of existing homes matched a two-decade low in April, according to statistics from the National Association of Realtors. Housing inventories in key markets continue to rise, as well, making it difficult for even institutional sellers to rid themselves of a growing number of REO on their balance sheets. S&P said it now expects loss severity to reach as high as 35 percent on Alt-A loans in the 2007 vintage, as a result. HW’s sources and data suggest those severity estimates may actually be conservative in some markets. A report released by Clayton Holdings, Inc. (CLAY) last week found, for example, that Alt-A loss severity in March 2008 averaged just over 38 percent — already 3 percent above S&P’s aggregate estimates. For more information, visit http://www.standardandpoors.com.