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Moody's To Hike RMBS Loss Severity Assumptions, Extends Expected Trough For Housing Prices

Tyler Durden's picture




 

A release out of Moody's today does not seem to jive too well with the prevalent assumption that 90%+ of a 3.5% bounce in GDP being driven by non-recurring events is the greatest way to ramp the market after several down days. The rating agency, always asleep at the wheel, has waited until the proverbial "end of the recession" to say that not only is it extending the cliff for the house price floor by 2 quarters (from 2009 to Q2 2010, expect a comparable extension some time in June 2010), because the last thing they need is to be proven wrong once again, and additionally it is increasing its estimates for loan loss severities for virtually all RMBS classes issued between 2005 and 2007. However, as all those losses will be eaten by the taxpayer and promptly funded by even more dollar devaluing pieces of paper, this release is likely to have no material impact on anything at all.

What is funny is that even Moody's acknowledges the gaping discrepancy between rosy data such as the Case-Shiller and actual cash flows as well as debt servicing, which continue deteriorating: "Even though the Case-Shiller index reported
home price gains for three consecutive months starting in June,
Moody's believes the overhang of impending foreclosures and the
continued rise in unemployment rates will impact home prices negatively
in the coming months."

We fully expect the mainstream media will ignore this particular Moody's release.

From Moody's:


Moody's Investors Service announced today that it will update certain
assumptions underlying its loss projections for each of the major U.S.
residential mortgage-backed securities (RMBS) sectors in the coming
weeks.

 

Moody's now expects that a trough in home prices will not be reached
until the middle of 2010. In addition, based on recent loan
loss severities, Moody's will increase its projected lifetime
loan losses for pools backing U.S. Jumbo, Alt-A,
Option ARM, and Subprime RMBS issued between 2005 and 2008.

 

The impact of the revisions is expected to be significant for Alt-A,
Option ARM, and some Jumbo pools backing securitizations from 2005-2007
,
with the most pronounced changes expected for the 2005 pools. Performance
has deteriorated significantly in the last six to nine months, with
loss severities trending higher than Moody's previous expectations.
The impact will be less pronounced for Subprime, but still notable
for the 2005 pools.

 

Since the first quarter of 2009, when Moody's last announced
revised lifetime loss expectations for the major RMBS sectors, several
key economic indicators and performance metrics have worsened relative
to expectations. Even though the Case-Shiller index reported
home price gains for three consecutive months starting in June,
Moody's believes the overhang of impending foreclosures and the
continued rise in unemployment rates will impact home prices negatively
in the coming months.

 

Moody's Economy.com (MEDC) now forecasts a third quarter
2010 home price trough. When Moody's last revised RMBS loss
projections the trough was projected to occur at the end of 2009.
MEDC projects a total peak-to-trough decline of 38%
(versus 35%), compounded by muted subsequent home price growth
of less than 5% in the year following the trough. Although
the magnitude of forecast peak-to-trough decline has only
worsened by 3 percentage points, the extended timeline will have
an adverse impact on mortgage pools and stressed borrowers will continue
to default at high rates.

 

Adding to borrowers' financial pressure, unemployment is now
projected to peak at over 10% in mid-2010 and to remain
in the high single digits for two years following.

 

Borrowers' refinancing options are still slim, and the benefits
of loan modifications have yet to be seen due to the 5-month trial
period during which modified loans must be reported as delinquent.

In addition, modifications of loans owned by the GSEs have outpaced
modifications of loans owned by private-label securitization trusts.
Moody's will continue to consider the effect of loan modifications
in its assessment of RMBS pools, potentially including Alt-A
and Option ARM deals, and will continue to monitor success and redefault
rates as information becomes available.

 

Moody's will update specific assumptions and announce the likely
implications for each of the major RMBS sectors, in the coming weeks.
In addition to the revisions to the home price trough and severity assumptions,
other parameters will also be re-assessed, including the
degree to which defaults are expected to slow down after the trough is
reached.

 

Moody's will begin taking rating actions as needed this quarter,
and will continue through the first quarter of next year.

 

 

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Thu, 10/29/2009 - 16:26 | 114434 RobotTrader
Thu, 10/29/2009 - 16:34 | 114445 bugs_
bugs_'s picture

Deep Shah.

Thu, 10/29/2009 - 16:54 | 114456 anynonmous
anynonmous's picture

moved

Thu, 10/29/2009 - 16:47 | 114457 ghostfaceinvestah
ghostfaceinvestah's picture

I can tell you the delinquency inventory in the mortgage market is astonishing.

Doesn't stop the Fed from buying another 18B from Fannie/Freddie (I thought the Fed was slowing down these purchases?)

http://www.ny.frb.org/markets/mbs/

Thu, 10/29/2009 - 17:07 | 114474 ghostfaceinvestah
ghostfaceinvestah's picture

check out some of these foreclosure auctions - not just the serfs getting foreclosed on these days.

http://southcoasthomes.freedomblogging.com/2009/10/29/these-laguna-beach...

Thu, 10/29/2009 - 17:22 | 114494 Anonymous
Anonymous's picture

But Jim Cramer said the bottom already happened.

Thu, 10/29/2009 - 18:05 | 114534 Brett in Manhattan
Brett in Manhattan's picture

Looks like a another statement Jimbo's gonna have to forget making. Kinda like this one in which he says subprime and CDOs are "Meaningless."

http://www.youtube.com/watch?v=BVl9SQ-KVmE&feature=related

Thu, 10/29/2009 - 17:24 | 114498 buzzsaw99
buzzsaw99's picture

All I heard was Moody's blah blah blah...

Thu, 10/29/2009 - 17:44 | 114520 Anonymous
Anonymous's picture

Time to raise the cigarette tax again. Not that anyone in New York buys their cigarettes there, but the anticipated number looks good in balancing the budget.

"Buying the Brooklyn Bridge" won't be a joke anymore, after they sell it.

Thu, 10/29/2009 - 20:22 | 114673 Assetman
Assetman's picture

Oh my... can you believe that the Fed has been buying the AAA Agency MBS crap... and it may not be AAA after all?????  Or worth anywhere close to par???

<sarcasm> My word, I didn't see that one coming... </sarcasm>

 

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