by Calculated Risk on 5/15/2010 08:50:00 AM

From Bloomberg: S&P Cuts to Junk Mortgage Bonds It Rated AAA in 2009 (ht Bob_in_MA, Justin)

Standard & Poor’s cut to junk the ratings on certain securities, backed by U.S. mortgage bonds, that it granted AAA grades when they were created last year ...

The reductions were among downgrades to 308 classes of so- called re-remics, or re-securitizations, created from 2005 through 2009 ...

“The downgrades reflect our assessment of the significant deterioration in performance of the loans backing the underlying certificates,” S&P analysts Cesar Romero and Terry G. Osterweil said in the statement.

Rated AAA last year and now junk ... ratings: what are they good for?

by Calculated Risk on 4/22/2010 07:05:00 PM

From Kevin G. Hall and Chris Adams at McClatchy Newspapers:
Senate panel: Ratings agencies rolled over for Wall Street

A Senate panel investigating the causes of the nation's financial crisis on Thursday unveiled evidence that credit-ratings agencies knowingly gave inflated ratings to complex deals backed by shaky U.S. mortgages because of the fees they earned for giving such investment-grade ratings.

I'm stunned but not surprised ...

by Calculated Risk on 10/18/2009 12:21:00 PM

Kevin Hall at McClatchy Newspapers writes: How Moody's sold its ratings -- and sold out investors (ht Atrios)

A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.

Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk.

How can securities be rated AAA one day, and junk the next?

The rating agencies pocketed the fees, and investors (including the Fed) still use their ratings. As Atrios jokes: "Not sure there have been negative consequence for them, so call it a win!"

by Calculated Risk on 7/06/2009 04:49:00 PM

From Reuters: S&P raises loss expectations for risky US mortgages

Standard & Poor's on Monday boosted its expectations for losses on risky loans backing U.S. mortgage securities ... [this] "significantly impact" bonds originally carrying AAA ratings, S&P said in a report.
...
S&P boosted loss projections for subprime loans made at the peak of the market in 2006 and 2007 to 32 percent and 40 percent from 25 percent and 31 percent, respectively. For 2005 loans, loss projections rose to 14 percent from 10.5 percent.

For Alt-A loans ... loss projections for 2006 and 2007 mortgages rose to 22.5 percent and 27 percent from 17.3 percent and 21 percent, respectively. S&P expects Alt-A loans from 2005 to post losses of 10 percent, up from its previous estimate of 7.75 percent.

Loss severities ... are expected to rise to 70 percent for 2006 and 2007 subprime bonds and 60 percent for Alt-A bonds issued in those years, S&P added.

According to the article, S&P noted a surge in the inventory of bank-owned properties. Here is the S&P report.

Update: From the S&P report: Standard & Poor's Chief Economist David Wyss expects "home prices will decline by an additional 5%-7% from the 2006 peak before residential real estate prices start to stabilize in the first half of 2010, marking an overall decline of approximately 37% from the July 2006 peak."

by Calculated Risk on 6/05/2009 09:20:00 PM

This weekend's 'This American Life' is about the rating agencies.

Here is preview (with a 7 min audio): Economy Got You Down? Many Blame Rating Firms. (ht Bob) A few excerpts:

"We hired a specialist firm that used a methodology called maximum entropy to generate this equation," says Frank Raiter, who until 2005 was in charge of rating mortgages at Standard and Poors. "It looked like a lot of Greek letters."
...
Managing director Tom Warrack was in the room when Standard and Poor's gave those mortgage-backed securities AAA ratings. He stands by that decision.

"I wouldn't say anything was missed," he says. "Never before in the history of the country, dating back to the Great Depression, have we had the type of nationwide market value declines, declines in home prices, and the associated default levels."

Warrack says that his agency required riskier loans to have more protections built in to receive the highest grade. He says the agency knew plenty about the mortgages inside those bonds. "We had lots of data," he says. "We had years' worth of data as to how borrowers perform over time."

by Calculated Risk on 3/19/2009 09:19:00 AM

From Reuters: Moody's may cut $241 billion jumbo mortgage debt

... reflecting widening stress in the U.S. housing market, Moody's Investors Service on Thursday said it may downgrade $240.7 billion of securities backed by prime-quality "jumbo" U.S. residential mortgages because defaults will be higher than they expected.
...
It said 70 percent of the 2005 senior securities will likely remain investment-grade, with the rest falling to "junk." Securities issued later may suffer deeper downgrades. Moody's also said subordinated securities from 2006, 2007 and 2008 transactions "will likely be completely written down."

Defaults continue to increase in higher priced areas ...

by Calculated Risk on 3/09/2009 10:37:00 PM

From the WSJ: S&P Puts Mortgage-Backed Securities on Downgrade Watch (ht Bob_in_MA)

Standard & Poor's Ratings Service on Monday placed its ratings on $552.8 billion worth of U.S. first-lien Alt-A residential mortgage-backed securities issued between 2005 and 2007 on watch for downgrade, saying it sees an increase in losses from the transactions issued in those years.
...
S&P said it believes continued foreclosures, distressed sales, an increase in carrying costs for properties in inventory and more declines in home sales will further depress prices and lead to higher losses.

The beat goes on.

by Calculated Risk on 2/26/2009 05:58:00 PM

From Reuters: S&P may cut $140 bln of prime jumbo mortgage deals (ht Brian)

Standard & Poor's said on Thursday it may downgrade 3,279 prime tranches of jumbo residential mortgage-backed deals with a market value of around $140 billion, after increasing its loss expectations for deals issued in 2006 and 2007.

More details from S&P (no link):

Standard & Poor's Ratings Services today placed its ratings on 3,279 classes from 209 U.S. first-lien prime jumbo residential mortgage-backed securities (RMBS) transactions issued in 2006 and 2007 on CreditWatch with negative implications. The affected classes totaled approximately $172.02 billion of original par amount, and have a current principal balance of $139.96 billion.
...
The CreditWatch placements reflect an increase in projected losses for prime jumbo transactions from these vintage years ... Our revised loss projections reflect an increase in our loss severity assumption to 40% from 30% for prime jumbo transactions issued in 2006 and 2007. This change is based on our 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 will depress prices further and lead loss severities higher than we had previously assumed. Additionally, there has been a persistent rise in the level of delinquencies among the prime mortgage loans supporting these transactions. ...

We anticipate reviewing and resolving these CreditWatch actions over the next several weeks.

Just more downgrades coming ...

by Calculated Risk on 2/17/2009 10:51:00 AM

Tanta used to joke "It's not a real estate bust until a mortgage insurer goes down". Of course Triad went down last year ...

From the WSJ: Moody's Slashes Ratings on Mortgage Insurers (ht Shnaps)

Ratings on MGIC Investment Corp. and Radian Group Inc. were cut Friday several notches to junk status because of what Moody's called deterioration in their franchise value, the likelihood of sustained losses for several years and substantially limited access to capital.

Moody's said MGIC's losses in the past year are putting "meaningful capital strain" on the company, which could breach maximum statutory risk to capital guidelines in the next 12 to 18 months without additional capital injections.

It downgraded the insurance-financial-strength ratings of MGIC units seven notches to Ba2, or slightly speculative, and MGIC's senior-debt ratings seven notches to B2, or speculative.
...
The rating agency also cut the insurance-financial-strength ratings of Radian's mortgage-insurance units seven notches to Ba3 and the insurance unit's insurance-financial-strength rating six notches to B1.

The mortgage insurers were cut out of the worst deals (lucky for them!), because Wall Street happily securitized 100% financing with 2nds and no MI. But the losses are still piling up.

by Calculated Risk on 12/18/2008 12:10:00 PM

Excerpts from S&P Press release (no link):

It's become clear during the past few months--and especially in the past few weeks--that the problems facing the global financial markets and the U.S. economy have left the commercial mortgage-backed securities (CMBS) sector in a fundamentally weaker credit position. As a result, Standard & Poor's Ratings Services is expecting an increase in the number and severity of CMBS downgrades in 2009 ...

"Now that the U.S. is officially in a recession, and since commercial real estate performance typically tends to lag U.S. economic developments, we're expecting property values to continue to drop and loans with marginal cash flow to default with increasing frequency," said credit analyst James Manzi. "We believe that borrowers with negative equity have little incentive to come 'out of pocket' to bring their payments current," he said.

Evidence of this malaise appears to be mounting: The delinquency rate has been increasing significantly, and Standard & Poor's internal reporting measures show an acceleration in the volume of troubled loans, especially large loans. "Any current change in property prices is hard to measure accurately because of the marked reduction in transaction volume during 2008, but estimates we've seen indicate a decline of roughly 10%-15% from the peaks of early 2007. And the gap between offered prices and asking prices, in our view, signals that valuations must decline further to restart any meaningful trading activity," said credit analyst Barbara Duka.
emphasis added

Unlike with residential real estate, commercial owners are much more willing to "walk away" from their properties. As we've discussed before, many commercial properties were purchased with interest reserves - and those reserves are currently covering the negative cash flow. When the interest reserves run out, the owners will probably default.

by Calculated Risk on 10/22/2008 05:23:00 PM

From Bloomberg: Credit-Rating Companies `Sold Soul,' Employees Said

Employees at Moody's Investors Service told executives that issuing dubious creditworthy ratings to mortgage-backed securities made it appear they were incompetent or ``sold our soul to the devil for revenue,'' according to e-mails obtained by U.S. House investigators.

Barry Ritholtz has some excerpts of an IM conversation between two S&P analysts:

Rahul Dilip Shah: btw: that deal is ridiculous

Shannon Mooney: I know right ... model def does not capture half of the risk

Rahul Dilip Shah: we should not be rating it

Shannon Mooney: we rate every deal

Shannon Mooney: it could be structured by cows and we would rate it

Here is the House Oversight Committee transcript from April 2007.

by Calculated Risk on 10/15/2008 05:26:00 PM

From Bloomberg: S&P Reviews $280.1 Billion of Alt-A Mortgage Debt

Standard & Poor's said it may downgrade $280.1 billion of Alt-A mortgage securities, the most that the ratings company has identified in a single announcement for bonds backed by the loans.

The debt may be cut in part because S&P has boosted estimates for losses on each foreclosure on Alt-A loans with at least five years of fixed rates to 40 percent, from 35 percent ...

``There has been a persistent rise in the level of delinquencies among the Alt-A mortgage loans supporting these transactions,'' S&P analysts Scott Davey and Ernestine Warner said in the statement.

The beat goes on.

by Calculated Risk on 9/15/2008 05:15:00 PM

From Bloomberg: WaMu Rating Lowered to Junk by S&P on Mortgage Losses (hat tip Justin)

Washington Mutual Inc. ... had its credit rating cut to junk by Standard & Poor's because of the deteriorating housing market.
...
``Increasing market turmoil and the related impact from managing its concentrated mortgage franchise in this troubled housing and credit cycle led to the downgrade,'' S&P wrote.

And the beat goes on ...

by Calculated Risk on 9/09/2008 02:11:00 PM

From S&P (no link):

Standard & Poor's Ratings Services said today that it placed ... Lehman Brothers ... on CreditWatch with negative implications.

"The CreditWatch listing stems from heightened uncertainty about Lehman's ability to raise additional capital, based on the precipitous decline in its share price in recent days," said Standard & Poor's credit analyst Scott Sprinzen. "Although the ratings ultimately could be affirmed, we do not currently rule out the possibility of lowering the ratings by more than one notch."

Meanwhile Lehman stock is off 36% right now. (WaMu off 24%)

by Calculated Risk on 6/05/2008 08:00:00 PM

From MarketWatch: Fitch downgrades MGIC Investment, PMI ratings

Fitch Ratings on Thursday downgraded MGIC Investment Corp., noting it has become much more pessimistic on its outlook for the mortgage insurance sector. ... Fitch also cut PMI Mortgage Insurance's rating ...

Didn't Tanta once say it won't feel like a real housing bust until at least one mortgage insurer goes bankrupt?

by Calculated Risk on 6/04/2008 12:57:00 PM

From AP: Moody's may downgrade Ambac, MBIA ratings (hat tip Nemo, Juan)

Haven't we been here before?

by Calculated Risk on 6/02/2008 01:48:00 PM

From Bloomberg: Morgan Stanley, Merrill, Lehman Ratings Cut by S&P

Morgan Stanley, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. had their credit ratings lowered by Standard & Poor's on expectations the securities firms will be forced again to write down the value of their assets.
...
``The negative actions reflect prospects of continued weakness in the investment banking business and the potential for more write-offs, though not of the magnitude of those of the past few quarters,'' Tanya Azarchs, an S&P analyst, said today in a statement.

Also the outlooks for just about the entire large financial institutions sector are now negative.

Contained. Problems behind us. ... Not!

by Calculated Risk on 5/30/2008 03:23:00 PM

"I don't know if it's going to be a majority or not but I think a large number of the [Alt-A] senior classes are facing downgrade pressure."
Grant Bailey, a senior director at Fitch, May 30, 2008

From Bloomberg: Fitch Changes Method of Rating Alt-A Mortgage Bond

Fitch Ratings modified how it assesses outstanding securities backed by Alt-A U.S. mortgages by starting to update projections for losses from non-delinquent loans instead of keeping estimates static from the time of issuance.

A record jump in delinquencies and defaults prompted the change ... Borrowers are at least 60 days late on 11 percent of adjustable-rate Alt-A loans backing bonds created in 2006 and rated by the firm, compared with a historical average of 1 percent to 2 percent.
...
The firm hasn't yet decided whether to use its new surveillance approach on prime-jumbo mortgage securities, Barberio said....

The Fitch analysts weren't able to immediately say how many Alt-A securities from the past three years have been downgraded. Most of the non-AAA bonds were lowered and others remain under review, they said.

Top-rated securities accounted for about 90 percent of the debt created in Alt-A deals. The company will downgrade many over the next few months, [Grant Bailey, a senior director at Fitch] said.

``I don't know if it's going to be a majority or not but I think a large number of the senior classes are facing downgrade pressure,'' he said.

More downgrades coming ...

by Calculated Risk on 5/28/2008 11:50:00 PM

Housing Wire has more on the S&P Alt-A downgrades: S&P Lowers the Boom on 1,326 Alt-A RMBS Classes

The downgrades affect an $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.

by Calculated Risk on 5/28/2008 04:54:00 PM

From Bloomberg: S&P Downgrades $34 Billion of Bonds Backed by Alt-A Mortgages (hat tip ken and SC)

Standard & Poor's lowered its ratings on $34 billion of securities backed by Alternative-A mortgages, the firm's largest downgrade for the type of debt ...

Ratings on 1,326 classes of the bonds created in the first half of 2007 were downgraded, or 14 percent of the total ...