by Tanta on 5/21/2008 08:10:00 AM

Via naked capitalism, there is this ugly report in the Financial Times:

Moody’s awarded incorrect triple-A ratings to billions of dollars worth of a type of complex debt product due to a bug in its computer models, a Financial Times investigation has discovered.

Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.

That's bad. That's really bad. But then there are these two paragraphs at the end of the article:

The world’s other major credit agency, Standard and Poor’s, was the first to award triple A status to CPDOs but many investors require ratings from two agencies before they invest so the Moody’s involvement supplied that crucial second rating.

S&P stood by its ratings, saying: “Our model for rating CPDOs was developed independently and, like our other ratings models, was made widely available to the market. We continue to closely monitor the performance of these securities in light of the extreme volatility in CDS prices and may make further adjustments to our assumptions and rating opinions if we think that is appropriate.”

The implication here, that Moody's jiggered its model to arrive at the same ratings S&P had already arrived at--presumably to keep the "second opinion" business--is ugly. However, the implication that Moody's had to fudge the numbers in order to come up with AAA on these deals but S&P came up with AAA with a "correct" model is something I for one am having a hard time with.

by Calculated Risk on 4/29/2008 07:50:00 PM

From Reuters: S&P cuts $41 bln of mostly higher-rated Alt-A deals

Standard & Poor's cut the ratings on about $41 billion of mostly higher-rated U.S. residential mortgage-backed securities backed by so-called Alt-A loans on Tuesday.

The rating agency's action affected 2,183 RMBS classes from 334 Alt-A deals originated during 2006.

And here is a key statement on foreclosures and REOs:

"Due to current market conditions, we are assuming that it will take approximately 15 months to liquidate loans in foreclosure and approximately eight months to liquidate loans categorized as real estate owned (REO)."

So homes going into foreclosure today - in S&P's view and on average - will be liquidated 15 months from now, or in the summer of '09. So much for the '09 spring selling season - it will be dominated by REOs from the record foreclosure activity today.

by Calculated Risk on 4/22/2008 07:26:00 PM

Roger Lowenstein writes in the New York Times Magazine: Triple-A Failure (hat tip Jasper and others). This is an excellent overview of how the rating agencies failed. Here is an excerpt:

Moody’s recently was willing to walk me through an actual mortgage-backed security step by step. I was led down a carpeted hallway to a well-appointed conference room to meet with three specialists in mortgage-backed paper. Moody’s was fair-minded in choosing an example; the case they showed me, which they masked with the name “Subprime XYZ,” was a pool of 2,393 mortgages with a total face value of $430 million.

Subprime XYZ typified the exuberance of the age. All the mortgages in the pool were subprime — that is, they had been extended to borrowers with checkered credit histories. In an earlier era, such people would have been restricted from borrowing more than 75 percent or so of the value of their homes, but during the great bubble, no such limits applied.

Moody’s did not have access to the individual loan files, much less did it communicate with the borrowers or try to verify the information they provided in their loan applications. “We aren’t loan officers,” Claire Robinson, a 20-year veteran who is in charge of asset-backed finance for Moody’s, told me. “Our expertise is as statisticians on an aggregate basis. We want to know, of 1,000 individuals, based on historical performance, what percent will pay their loans?”

The loans in Subprime XYZ were issued in early spring 2006 — what would turn out to be the peak of the boom.

Lowenstein follows XYZ through the rating process, and through the eventual downgrades.

Almost immediately, the team noticed a problem. Usually, people who finance a home stay current on their payments for at least a while. But a sliver of folks in XYZ fell behind within 90 days of signing their papers. After six months, an alarming 6 percent of the mortgages were seriously delinquent. (Historically, it is rare for more than 1 percent of mortgages at that stage to be delinquent.)

Moody’s monitors began to make inquiries with the lender and were shocked by what they heard. Some properties lacked sod or landscaping, and keys remained in the mailbox; the buyers had never moved in. The implication was that people had bought homes on spec: as the housing market turned, the buyers walked.

By the spring of 2007, 13 percent of Subprime XYZ was delinquent — and it was worsening by the month.

Shocked? Homebuyer's were speculating with no money down. Mortgage brokers didn't care because they would sell the loans immediately and collect their fees. Wall Street didn't care because they could package the loans and sell them to investors. Investors would have cared, except they trusted the rating agencies. And as this article describes, the rating agencies weren't evaluating the underlying loans - they were performing statistical analysis using models based on lenders that cared if the borrower would repay the loan.

At the same time, regulators - despite numerous warnings - mostly ignored the problem, apparently for ideological reasons ("let the free market work"). What a mess.

by Calculated Risk on 4/22/2008 04:58:00 PM

From Paul Jackson at Housing Wire: Stick a Fork in It: Moody’s Downgrades 1,923 Subprime RMBS Classes — In Just Two Days

Between Monday and Tuesday, calculations by Housing Wire show that the rating agency has slashed ratings on 1,923 tranches from 232 seperate subprime RMBS deals from 2005-2007 vintages.

That total includes hundreds of formerly Aaa-rated securities ...

The downgrades surely tally into the multiple of billions worth of subprime debt, and portend additional earnings pain for many market participants — write-downs on the value of RMBS in a portfolio usually aren’t marked up until a downgrade takes place.

Is it Friday yet?

by Calculated Risk on 4/11/2008 02:30:00 PM

From MarketWatch: Fitch warns on darker outlook for home builders

Home builders are facing the twin specters of a slowing U.S. economy and a housing contraction that looks likely to extend through 2008, Fitch Ratings said Friday.
...
"[A] modest recession, declining home prices, tighter mortgage standards even for conventional loans, poor buyer psychology and record levels of new and existing homes for sale will continue to define the current environment for housing."
[said Bob Curran, Fitch's lead home-building analyst]

Press Release from Fitch: U.S. Housing Contraction Has Legs, Teleconference 4/15 @ 11AM ET

Following are the details of the teleconference:
--Date: Tuesday April 15, 2008
--Time: 11:00 a.m. ET
--Conference ID: 43464842
--U.S/Canada: +1-866-529-2924

Might be an interesting conference call.

by Calculated Risk on 4/08/2008 08:01:00 PM

Via Reuters: S&P release on four U.S. mortgage insurers (hat tip Steve)

On house prices:

[W]e believe median home prices will decline 20% from the peak in 2006. By contrast, the forecasts we used in November 2007 assumed a decline of 11%.

On unemployment:

When we resolved the CreditWatch status of several mortgage insurer ratings on Nov. 21, 2007, we stated that if unemployment rose above 6%, incurred losses for all mortgage insurers would be significantly higher than our expectations. Our most recent macroeconomic forecast shows unemployment reaching 5.8% in 2009, and there is considerable uncertainty in the job markets.

And the four insurers:

Standard & Poor's Ratings Services said today that it lowered its counterparty credit rating on MGIC Investment Corp. to 'BBB' from 'A-' and its counterparty credit and financial strength ratings on the mortgage insurance subsidiaries (MGIC) to 'A' from 'AA-'. The ratings were removed from CreditWatch, where they were placed on Jan. 24, 2008, with negative implications. The outlook is negative.

Standard & Poor's also said that it lowered its counterparty credit rating on Old Republic International Corp. (ORI.N: Quote, Profile, Research) (ORI) to 'A' rom 'A+' and its counterparty credit and financial strength ratings on ORI's core subsidiaries to 'AA-' from 'AA'. The ratings were removed from CreditWatch, where they were placed on Feb. 25, 2008, with negative implications. The outlook is negative.

At the same time, Standard & Poor's lowered its counterparty credit rating on PMI Group Inc. (PMI.N: Quote, Profile, Research) (PMI Group) to 'BBB+' from 'A' and its counterparty credit and financial strength ratings on PMI Group's mortgage insurance subsidiaries in the U.S. (PMI) and Europe (PMI Europe) to 'A+' from 'AA'. The ratings were removed from CreditWatch, where they were placed on Feb. 13, 2008, with negative implications. The outlook is negative.

In addition, Standard & Poor's lowered its counterparty credit rating on Radian Group Inc. (RDN.N: Quote, Profile, Research) (Radian Group) to 'BBB' from 'A-' and its counterparty credit and financial strength ratings on Radian Group's mortgage insurance subsidiaries (Radian MI) to 'A' from 'AA-'. These ratings remain on CreditWatch, where they were placed on Feb. 13, 2008, with negative implications.

by Calculated Risk on 4/04/2008 05:19:00 PM

From Bloomberg: MBIA Loses AAA Insurer Rating From Fitch Over Capital

Fitch Ratings cut the rating on MBIA Inc.'s insurance unit to AA from AAA, saying the bond insurer no longer has enough capital to warrant the top ranking.
...
Fitch issued the new, lower rating even though Armonk, New York-based MBIA asked the ratings company last month to stop assessing its credit worthiness.

by Calculated Risk on 3/10/2008 02:46:00 PM

From Paul Jackson at Housing Wire: Fitch Downgrades National City, Wamu, Others on Home Equity Concerns

Deterioration within home equity portfolios will clearly emerge in first-quarter 2008,” the agency said in a press statement late Friday, “which is earlier than Fitch previously expected.”
...
“Home equity delinquency rates are rising at a far more rapid pace than even most bankers’ and analysts’ grim outlook for 2008 had anticipated,” it said. The agency characterized home equity loans originated by brokers, and located in a locale enduring swift price declines such as California, as “particularly toxic.”

HELOCs. Alt-As. We are all subprime now.

by Calculated Risk on 3/10/2008 02:01:00 PM

Last week, MBIA asked Fitch to withdraw ratings on several of its units.

Today Fitch responded (via MarketWatch): Fitch calls MBIA info destruction request 'disingenuous' (hat tip Charlie)

[Stephen Joynt, the chief executive of Fitch Ratings] told MBIA it was "considering" MBIA's request to withdraw IFS ratings, and that it was willing to waive rating fees.

Joynt also asked MBIA if they were asking S&P and Moody's to waive their fees.

For those with access, here is the Fitch response.

by Calculated Risk on 3/10/2008 12:31:00 PM

From CNNMoney: Moody's downgrades Alt-A deals

Moody's downgraded the ratings of 163 tranches from 15 deals issued by Bear Stearns ALT-A Trust, with 78 downgraded tranches remaining on review for possible further downgrades.

Moody's said the downgrades are based on 'higher-than-anticipated rates of delinquency, foreclosure and REO in the underlying collateral relative to credit enhancement levels.'

Also, former Bear Stearns CEO "Ace" Greenberg responded on CNBC to a rumor that Bear faced a liquidity crisis:

"It's ridiculous, totally ridiculous."

by Calculated Risk on 2/29/2008 01:58:00 PM

From MarketWatch: S&P may downgrade 1,887 classes of Alt-A mortgage securities (hat tip crispy&cole)

Standard & Poor's said on Friday that it may downgrade 1,887 classes of mortgage securities backed by so-called Alt-A home loans. ... There's been a persistent increase in delinquencies on the loans underlying these securities, S&P said.

From Reuters: S&P may cut $14 bln of subprime debt, eyes CDOs (hat tip Barley)

Standard & Poor's on Friday said it is reviewing $14 billion of subprime-related debt for a ratings cut and may act on related collateralized debt obligations within "days," the rating company said.

S&P took the action due to rising delinquencies on higher quality mortgage loans known as "Alt-A loans," ...

by Calculated Risk on 2/13/2008 06:48:00 PM

From the WSJ: S&P Cuts Ratings On $6.75 Billion In CDO Tranches

Standard & Poor's lowered its ratings on 66 tranches with a total value of $6.75 billion, from 10 U.S. cash-flow and hybrid collateralized-debt-obligation transactions.
...
So far, S&P has cut ratings on 1,567 tranches from 434 U.S. cash-flow, hybrid, and synthetic CDO transactions ... In addition, 2,305 ratings from 589 transactions are on watch for possible downgrades. The affected CDO tranches have a total value of $343.63 billion.

The slow steady drumbeat of downgrades continues ...

by Calculated Risk on 2/08/2008 04:19:00 PM

A few weeks ago, I mentioned Sean Egans (of Egan-Jones) estimate that the monoline insurers need $200 billion in capital.

To balance Egans' view, here is a response from Thomas Brown at Bankstock.com: Sean Egan: Giving the Backs of Envelopes a Bad Name

I got a call last week from Sean Egan of bond rater Egan Jones after I expressed doubt here about his much-bandied-about estimate ...

... Egan told me that he looked at each guarantor’s subprime mortgage and second lien exposure, and simply assumed 30% loss across the board. He then added up his estimates for all the guarantors, and arrived at $80 billion. Then he multiplied that by three, on the assumption that the rating agencies require three times anticipated losses to maintain a AAA rating. Then he took the result, $240 billion, and rounded it down to “over $200 billion” because it was such a big number.

I kid you not. Sean Egan has done the impossible. He’s managed to make S&P and Moody’s look like models of analytical rigor by comparison.

If accurate, I'm very surprised Egans' analysis wasn't more rigorous.

Here is another bearish view from David Roche writing in the Financial Times: Insight: The fire threatens credit insurance

If the monoline guarantees on bonds and credit derivatives were to be removed, the rule of thumb is that every 1 per cent decline in the price of insured bonds would give rise to $10bn of losses on bond portfolios elsewhere in the system. We estimate bond portfolio losses of $150bn-200bn were this to happen – or equivalent to the impact of the subprime crisis on the US banks.

I'm not confident that anyone has a concrete estimate of the future losses. Part of the problem is the insurers only pay for actual realized losses, and it takes a long time for those losses to show up (even though we all know they are coming). This is a story that will unfold slowly, and the ultimate losses depend on how far house prices fall, and on how many homeowners default.

by Calculated Risk on 2/08/2008 12:22:00 PM

PR from Fitch: Fitch Places 87 RMBS Bonds Wrapped by MBIA on Rating Watch Negative

Fitch Ratings has placed 87 classes of residential mortgage-backed securities (RMBS) guaranteed by MBIA on Rating Watch Negative. Fitch placed MBIA's 'AAA' Insurer Financial Strength (IFS) on Rating Watch Negative following Fitch's announcement that it will be updating certain modeling assumptions in its ongoing analysis of the financial guaranty industry.

With the possibility that modeled losses for structured finance collateralized debt obligations (SF CDOs) may increase materially as a result of these updated projections, Fitch believes that loss projections will be most sensitive to loss given default assumptions used for SF CDOs that reference subprime RMBS collateral. Fitch will update the market upon conclusion of its analysis.

The ratings agencies are still tiptoeing towards the eventual downgrade.

by Tanta on 2/06/2008 10:08:00 AM

Moody's is throwing out some possibilities for changes to its rating system that would give more information to bond buyers, and is inviting comment from the investment community. Mr. Ritholtz over at Big Picture has a suggestion for a disclosure statement that has too many dirty words in it for me to post on my respectable blog, but here's the link.

Here are the proposed options, from Moodys' request for comment:

1. Move to a completely new rating scale for structured securities, for example, numerical rankings of 1-21. These would continue to contain ordinal rankings of expected credit risk and would probably map to corporate ratings.

2. Add a modifier to all structured ratings utilizing the existing rating scale, e.g., Aaa.sf. This would designate the issue as structured, but add no other additional information.

3. Add a suffix to the existing rating scale for structured ratings that contains additional information – for example, estimates of multi-notch rating transition risk. This could be Aaa.v1, Aaa.v2, etc. We would derive these gradations through an analytical process that would be disclosed to the market.

4. Use the existing rating scale for structured securities, and put additional analytical information in a separate scale that would exist in a separate data field. For example, an issue could have a “Aaa rating, with a ratings change risk indicator of v1”. The added field would be analogous to our existing ratings outlooks and watchlists.

5. Make no changes to the rating scale, but provide additional information and commentary through written research.

I personally like the idea of combining alpha ratings with a suffix code that indicates the assumptions built into the ratings models. For instance, a bond could be rated AAA.PONY, indicating that the assumptions built into the ratings were Prices always rise, Owners occupy all units, Nobody lied, and Your own analysts did all the due diligence.

Is that any more bizarre than giving a rating to a security with a "ratings change risk indicator"? Wasn't there a time when the rating given to a bond was supposed to be the one least likely to have to be changed?

by Calculated Risk on 2/04/2008 12:32:00 PM

From Bloomberg: Moody's Raises Loss Assumption to Almost 18 Percent for CDOs (hat tips SC, Brian)

Moody's Investors Service raised its loss assumptions to as much as 17.8 percent on 2006 subprime bonds packaged into collateralized debt obligations, heralding further ratings downgrades as defaults increase.

Losses are assumed to be at least 14.8 percent, more than double its forecast of last April ...

More downgrades coming.

by Tanta on 2/01/2008 09:23:00 AM

Early edition of your Friday Rating Actions (registration required):

New York, January 31, 2008 -- Moody's Investors Service has announced rating actions on a number of mortgage insurance companies due to continued US mortgage market stress and significant uncertainty about the amount of mortgage insurance claims that could emerge over the next several years. The following rating actions have been taken. The Aa2 insurance financial strength (IFS) ratings of the mortgage insurance subsidiaries of The PMI Group and the Aa3 IFS rating of Triad Guaranty Insurance Corporation were placed on review for possible downgrade. The Aa2 IFS ratings of the mortgage insurance subsidiaries of Genworth Financial and the Aa3 IFS rating of Republic Mortgage Insurance Company were affirmed, but the rating outlooks were changed to negative. The Aa2 IFS ratings of the mortgage insurance subsidiaries of United Guaranty Corporation (a wholly-owned subsidiary of American International Group, Inc.) were affirmed with a stable outlook. In the same rating action, Moody's placed the Prime-1 commercial paper rating of MGIC Investment Corp. on review for possible downgrade. The Aa2 IFS ratings on the main mortgage insurance subsidiaries of MGIC Investment Corp and the Aa3 IFS mortgage subsidiary ratings of Radian Group Inc. remain on review for possible downgrade.

These rating actions result from Moody's increased loss expectations for US residential mortgages and the potential adverse impact on mortgage insurer capitalization relative to previous assumptions. Moody's announced on January 30, 2008 that its projection for cumulative losses on 2006 vintage subprime mortgages is now in the 14-18% range and that it will update loss projections for other mortgage types over the next several weeks. While the majority of the mortgage insurers' exposure is to prime fixed-rate conforming mortgage loans, the industry does have material exposure to Alt-A and subprime mortgage loans.

Moody's stated that rating actions for specific mortgage insurers were influenced by Moody's views regarding the volatility in expected performance of the insured portfolio, as well as the existence of implicit and explicit forms of parental support for companies that are wholly-owned subsidiaries of larger diversified insurance holding companies. Moody's will, in the next several weeks, update its evaluation of capital adequacy of mortgage insurers based on updated information and incorporating revised expectations about performance across different loan types. Moody's will consider updated estimates of capital adequacy in the context of potential capital strengthening measures or other strategies that may be under consideration at these companies. Moody's will also be considering the changing risk and opportunities to the mortgage insurers as a result of shifting dynamics in the conforming mortgage market.

I'd say that last sentence translates as "we're still trying to figure out how much trouble they'd be in if they started insuring these LFKAJs."

by Calculated Risk on 1/30/2008 05:01:00 PM

From Bloomberg: S&P Lowers or May Cut Ratings on $534 Billion of Mortgage Debt (hat tip Tank, RayOnTheFarm)

Standard & Poor's lowered or may cut ratings on $534 billion of residential mortgage securities and collateralized debt obligations.

According to the Fed Flow of Funds report, household have $10.4 trillion in mortgage debt. S&P's announcement today alone is for about 5% of that debt.

by Calculated Risk on 1/18/2008 09:05:00 PM

From MarketWatch: Fitch Downgrades 420 ABS Bonds Following Ambac Rating Downgrade; Watch Negative (hat tip Risk Capital)

Fitch Ratings downgrades 420 classes of asset-backed securities (ABS) Additionally, the ratings remain on Rating Watch Negative by Fitch. This action follows Fitch's downgrade of the ratings on Ambac ...

Check out the ABS list at MarketWatch: aircraft transactions, student loan bonds, auto loans - the impact from a bond insurer downgrade is widespread.

Finally it feels like a Friday night!

by Calculated Risk on 1/17/2008 03:38:00 PM

Reuters reports that S&P said today that they expect monoline insurer losses to be 20% higher than they forecast last month. See Reuters: S&P says bond insurance losses likely 20 pct higher (hat tip Michael)

More good news for the bond insurers.

This video of Cramer's comments is interesting.

Added: Excerpts from Standard & Poor's Press Release:

Standard & Poor's Ratings Services announced today that it has updated the results of its bond insurance stress test, originally published on Dec. 19, to incorporate the revised assumptions announced on Jan. 15 by Standard & Poor's RMBS surveillance group.

The new results show total projected losses for the industry to be 20% higher than those in the previous review. Individual company increases ranged from a low of 2% to a high of 36%. Standard & Poor's has not taken rating action on any company at this time.

The increased projected losses did not materially impair the adjusted capital cushions of the companies that had stable outlooks. For the other companies, the fact that their ratings either had a negative outlook or were on CreditWatch reflected uncertainty surrounding the potential for further mortgage market deterioration and the companies' ability to accurately gauge their ongoing additional capital needs. This latest round of revised assumptions is an example of the deterioration that was contemplated.
...
The revised assumptions announced by the RMBS surveillance group reflect the growing economic consensus that U.S. home price declines will be larger than previously forecasted and that the U.S. housing market slump may last far longer than previously expected. These factors, combined with the persistence of significant growth in seriously delinquent borrowers, are leading to upward revisions in loss expectations and a greater likelihood of the realization of these expectations. Specifically, the expected losses for the 2005, 2006, and 2007 vintages of subprime collateral have been revised to 8.5%, 18.8%, and 17.4%, respectively, levels meaningfully higher than the 5.75%, 15.5%, and 17.0% levels used in our December 2007 stress test.

Here are the companies ranked by percentage increase in S&P expected losses:
ACA 36% worse than expected in December.
CIFG 26%
Radian 26%
Ambac 22%
MBIA 11%
XLCA 10%
FSA 2%
AGC 2%