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Moody's Puts $143 Billion Of Jumbo RMBS On Downgrade Review
With the ABX Prime index stirring those willing to take risk on prime residential exposure, Moody's came out with a report demonstrating why there likely will be a recurring offer on the index. In short:
Moody's Investors Service has revised its loss projections for US prime
jumbo residential mortgage backed securities (RMBS) issued between 2005
and 2008. On average, Moody's is now projecting cumulative
losses of 3.8% for 2005 securitizations, 8.0%
for 2006 securitizations, 10.9% for 2007 securitizations
and 12.3% for 2008 securitizations, reported as a
percentage of original balance. As a result of the revision,
Moody's has now placed 4474 tranches of jumbo RMBS with an original
balance of $234 billion and current outstanding balance of $143
billion, on review for possible downgrade.
Moody's is also aggressively hiking delinquent loan estimates in the near term.
To estimate losses, Moody's first projected delinquencies
through the second half of 2010. Moody's estimated that the
proportion of contractually current or 30-day delinquent loans
today that will become seriously delinquent by the second half of 2010
will be 3.7%, 7.0%, 8.4%,
and 9.4% for the 2005, 2006, 2007 and 2008 vintages,
respectively.
So much for no taxpayer losses on GSE exposure.
Full Moody's text:
New York, December 17, 2009 -- Moody's Investors Service has revised its loss projections for US prime
jumbo residential mortgage backed securities (RMBS) issued between 2005
and 2008. On average, Moody's is now projecting cumulative
losses of 3.8% for 2005 securitizations, 8.0%
for 2006 securitizations, 10.9% for 2007 securitizations
and 12.3% for 2008 securitizations, reported as a
percentage of original balance. As a result of the revision,
Moody's has now placed 4474 tranches of jumbo RMBS with an original
balance of $234 billion and current outstanding balance of $143
billion, on review for possible downgrade.
Moody's has already taken widespread rating actions on deals backed by
jumbo collateral from the 2005-2008 vintages from March through
July of this year. The updated loss projections will have the greatest
impact on senior securities issued in 2005.
On October 29th, Moody's announced that it would update certain
assumptions underlying loss projections for each of the major RMBS sectors.
The rapidly deteriorating performance of jumbo pools in conjunction with
macroeconomic conditions that remain under duress prompted today's
announcement. Over the past nine months serious delinquencies (loans
60 or more days delinquent, including loans in foreclosure and homes
that are held for sale) on jumbo mortgage pools backing 2005 to 2008 securitizations
have increased markedly. Since March, serious delinquencies
for the 2005, 2006, 2007 and 2008 vintages have increased
to 3.2% from 2.1%, 6.0%
from 3.8%, 7.6% from 4.8%
and 7.8% from 4.6% respectively (reported
as a percentage of original pool balance).
Even though the Case-Shiller index in recent months has reported
very modest home price gains, Moody's believes the overhang of impending
foreclosures will impact home prices negatively in the coming months.
Moody's Economy.com (MEDC) expects home prices to decline
an additional 9% to reach a peak-to-trough decline
of approximately 37%. Adding to borrowers' financial pressure,
unemployment is now projected to peak at around 10.6% from
previous projections of 9.8% from the first quarter of this
year. Both measures are expected to reach their peaks sometime
in the second half of 2010, after which recovery is expected to
be slow.
Estimation of Losses
To estimate losses, Moody's first projected delinquencies
through the second half of 2010. Moody's estimated that the
proportion of contractually current or 30-day delinquent loans
today that will become seriously delinquent by the second half of 2010
will be 3.7%, 7.0%, 8.4%,
and 9.4% for the 2005, 2006, 2007 and 2008 vintages,
respectively.
Growth in new delinquency levels beyond the second half of 2010 is expected
to decline with improving economic and housing conditions. To estimate
delinquencies beyond 2010, Moody's decelerated the new delinquency
rates by 15% for 2011, 25% for 2012, 35%
for 2013 and 40% for 2014 and beyond. The deceleration rates
reflect home price, unemployment and foreclosure projections from
MEDC beyond 2010.
To calculate the default rate on the projected delinquencies, Moody's
assumed an average roll rate (probability of transition from delinquency
into default) of 88%. The loss on the loan upon default
(severity of loss) is expected to be around 50% on average --
this is higher than historical severities as home prices are expected
to depreciate further.
In addition, the government's effort to curb loan defaults
and foreclosures through loan modification has failed to gain traction;
prompting Moody's to reduce the average modification benefit to
projected losses across vintages from 15% in March to less than
5% going forward.
Moody's will release a special report in the coming weeks that will
detail its methodology for determining revised loss projections for jumbo
transactions issued from 2005 to 2008.
Rating Actions
To assess the rating implications of the updated loss levels on jumbo
RMBS, Moody's will analyze each transaction through a variety
of scenarios in the Structured Finance Workstation (SFW), the cash
flow engine provided by Moody's Wall Street Analytics. The
scenarios incorporate ninety-six different combinations of loss
levels, loss timing (CDR)and prepayment (CPR) curves.
On senior securities, the extent of rating actions due to the revised
loss projections will vary by vintage. Currently, over 70%
of the senior securities issued in 2005 maintain investment grade ratings.
Moody's anticipates a majority of these ratings to migrate to Ba/B
ratings. However, over 70% of the senior securities
issued in 2006 and 2007 are already rated below investment grade and consequently
are expected to experience smaller rating migrations. In general,
bonds that have a short estimated life or are supported by other senior
securities will more likely see smaller rating transitions. The
rated subordinated tranches from 2005 to 2008 vintages have already been
downgraded to Ca or C.
Moody's rates securities B2 or higher if they are likely to be paid off
under an expected scenario. If a security is likely to take a loss
under an expected scenario, it will typically be rated B3 or lower.
Securities with expected recoveries of 65% to 95% are rated
in the Caa range. Securities with expected recoveries of 35%
to 65% are rated Ca, while securities with expected recoveries
below 35% are rated C.
Other methodologies and factors that may have been considered in the process
of rating this issue can also be found at www.moodys.com
in the Rating Methodologies subdirectory.
»
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What are the chances any of this is sitting on Gentle Ben's balance sheet?
Why should it matter, Rusty?
Gentle Ben knows his purchased MBS has the explicit backing of the U.S. Government. He told Congressman Bunning as such... so it must be true.
Don't worry-- it's all good. Principal and interest are totally covered.
Moody's, Schmoody's.
Now let's move right along into Bank Failure Friday.......frontloaded due to next Friday being a HoHo Holiday.
First one on the score card is :
RockBridge Commercial Bank, Atlanta, GA
I'm bummed. I was counting on my MBS holdings (with B. Bernanke as my Trustee) acting as a backstop for Social Security, which is now in the red, if I understand what the House was saying when they raised the debt ceiling a couple of days ago. Well, so much for that. BB will have to go to Plan B.
<Moody's Investors Service has revised its loss projections for US prime jumbo residential mortgage backed securities (RMBS)>
<So much for no taxpayer losses on GSE exposure.>
Moody's is referencing private label RMBS, not GSE RMBS. The GSEs don't insure jumbo RMBS.
Yeah, but if Moody's if finally waking up to the losses that are coming for jumbos, what do you think the performance is going to be on conforming mortgages? Far worse than anyone thinks.
The think about jumbos is, most had either 20% down, or had second liens in front of them (sucks for the second lien holders). So the first had some protection.
The GSEs protection on high ltv loans is the private mi industry, which is teetering on the brink of collapse, and in fact one of them is now paying out claims at 60 cents on the dollar.
You put it correctly when you say "if Moody's is finally waking up to the losses". Prices in the RMBS market collapsed a long time before Moody's knew what was going on.
what do you think the performance is going to be on conforming mortgages? Far worse than anyone thinks.
What is the worst that anyone thinks and how bad do you think it's going to be?
well, maybe not "anyone", but certainly a lot of the analysts out there, with a few exceptions, many of them think that by some miracle over half of the currently delinquent borrowers are going to magically cure, for example.
But I have a feeling Fannie and Freddie have a good idea, thus the recent talk of them securing another $200B in taxpayer money (probably from the recently repaid TARP funds, why else the urgency to get it back). That is money the taxpayer will never get back.
On conforming agency business, I think losses will be worse than prime jumbo, the key with prime jumbo being "prime", during 2007/early 2008 the agencies were flooded with EA loans, MCM loans, etc, before they started cutting them off and sending those borrowers to the FHA, whereas jumbo at least had some FICO standards and generally weren't over 80LTV on the firsts, though CLTVs were certainly high, which will kill the seconds.
So if prime jumbo losses will be 20% for 2007 vintage like I think, conforming losses will be at least 25%. The MIs will absorb a lot of it, so it won't all go to the taxpayer, but severities will be steep so more of it than usual will, plus as I mentioned there are the MIs who won't be able to pay their claims.
It's gonna be ugly no matter how you slice it. How prices will adjust until mortgage payments are more in line with rent payments, they are still a bit high, though the downside is more limited. But what will kill mortgage performance is when borrowers realize house prices won't snap back fast, a lot think they will rebound like the stock market, but they won't, and when that reality sets in people will be walking away in droves.
But I have a feeling Fannie and Freddie have a good idea, thus the recent talk of them securing another $200B in taxpayer money (probably from the recently repaid TARP funds, why else the urgency to get it back).
Here's the reason for the urgency, from yesterday's NY Times (emphasis on bolded part mine):
<Fannie Mae and Freddie Mac, which buy and resell mortgages, have used $112 billion — including $15 billion for Fannie in November — of a total $400 billion pledge from the Treasury. Now, according to people close to the talks, officials are discussing the possibility of increasing that commitment, possibly to $400 billion for each company, by year-end, after which the Treasury would need Congressional approval to extend it. Company and government officials declined to comment.>
Exactly, on every point. F and F will get the TARP money to cover losses. That money is gone. Conforming losses will certainly be worse than prime jumbo. Moody's, probably after discussion with the Treasury, timed this leak so it wouldn't attract attention in the MSM, and it hasn't. The losses are going to be ugly and worse than Moody's predicts, because there would be no point in over-estimating.
It's just more evidence of the most fundamentally ignored aspect of the government response to this crisis. The toxicity remains. It can't be removed. It's in the DNA of the tranches themselves. Nothing that has been done has been about fixing the system or preventing future losses. The losses were guaranteed as prices were reset. The policy has been entirely about who takes the losses. Implementing reforms to incentivize accurate pricing of these securities and derived instruments has also been completely and studiously avoided. The use of fictional value has been institutionalized.
There is a social context that hasn't been considered in all of your informed responses: the holders of jumbo mortgages have to go somewhere and it is probably not to rent a two-bedroom apartment on the seedy side of town.
The downsizing trend from jumbo into conforming will actually prop up the Fannie and Freddie balance sheets.
True, it is going to be quite hideous but more probably on the higher end than in the middle. If you own a $125,000 house in Austin, you're sitting pretty right about now...relatively speaking, of course.
So is commerical property going to crater in 2010..is DRV going to $30 or $7?
If you figure out the answer to that one, please let me know.
These loss estimates are still way too low, they will probably be double, these guys still don't properly account for the behavior of underwater borrowers, because they have no historical data to look at. But recent behavior is showing that underwater borrowers are defaulting in droves, and it is picking up steam as people realize they can live rent free for months.
I have been saying this for months, at least they are starting to get it, but they have a way to go to get realistic estimates. You will see.
+1
Lots of squatter out there living for free and there will be more.
Once the top is off the moral hazard bottle, ouch.
Yeah, wait until the voluntary pre-payments slow and the defaults rise. The structure of these RMBS will continue to haunt banks/investors. Those little banks that were suckered into senior supports, mezz, etc will be grasping for their industrial size tube of Vaseline.
The shame of it all was that the Fed was scrambling back in March to ensure that ALL AAA MBS was eligible for purchase-- even though they full well knew it wouldn't be that way the next month. Someone was even able to get the rating agencies to reverse some ratings back to AAA based on who knows what.
One should start the Fed's MBS purchases with a 25% haircut, and work accordingly lower. Given the extent that PIMCO profited from some of their MBS holdings, I wouldn't be shocked if the Fed paid ABOVE par on stuff that was likely below BBB.
And since Ben thinks these things have explicit guarantees, they'll just move over to the Treasury-- adding a virtual boatload to an already bloated deficit.
I'm so shocked (not) by this (not) that I just don't know what to do(not).
Credit Suisse said 3.2 M foreclosures had to be prevented to moderate the housing market. My money is on less than 500K getting any help or modification.
By April the phrase "shitstorm" will become common vocabulary in bankster's bond/securitization departments.
Talking about residential mortgages are there any legal minds in the audience that can address the veracity of this:
Ms. Brackey: I am a paralegal at a firm which does nothing but defend foreclosure actions. I am absolutely astonished at the complete failure of circuit court judges, throughout the 3 county area, to apply basic rules of procedure and fundamental principals of law to the multitude of "Plaintiffs" who are suing homeowners for foreclosure. No one has publicized or written about the obvious "conspiracy" among all such judges, to allow the lenders to say and file anything and ignore the rules of law, just for the sake of moving the case to completion. I promise you, that if you discuss this issue with ANY foreclosure defense attorney, you will be shocked at what the local courts are doing. For example, the primary defense in any foreclosure case is that the Plaintiff does not actually own the promissory note. In most cases, they cannot even produce the actual promissory note. Plaintiff's attach copies of such to their complaint, and the copy proves that another entity is the lender. The law is well settled that in such a case the Complaint must be dismissed because the Plaintiff's own evidence establishes someone else owns the note. No Judge in the 3 counties has EVER granted such a request. They deny knowledge of the law, or simply tell you that they don't care, and dare you to appeal their decision. Another matter, just today. A lender filed suit for foreclosure, then filed an ex parte (no notice to the opposing party) motion to change the identity of the lender/Plaintiff, because the first lender never owned the note. The Court granted the ex parte Motion without notifying the Defendant of the existence of the motion or the order. This is patently a violation of the rules of procedure, and fundamental rights to due process. Today, the Judge laughed it off, and refused to do anything about the unlawful procedure, or the fact that the first Plaintiff caused the Defendant to hire a lawyer and expend fees, when they admittedly had no right to file suit in the first place. There are MULTIPLE examples of this abuse of the rule of law throughout these cases in South Florida. The result, homeowners are getting screwed because the Courts don't care if the Plaintiff is the legitmate owner of the note/mortgage or not. Their sole interest is to move the case out of their court as soon as possible. I think this is a great story, and again ask any foreclosure defense lawyer for similar examples, and you will be inundated with such.
http://tinyurl.com/ylx5bxc
As you might imagine, some judges see foreclosure defense, in cases where the homeowner is clearly not in compliance with the terms of the loan (owed to somebody, after all) is a species of hoax. On the other hand, there are a growing number of cases (in Massachusetts and California, e.g.) where judges have applied more stringently the rule of Real Party in Interest so the plaintiff must demonstrate the successive assignments which have resulted in his right to foreclose. One thing that might start to tip the legal scales in favor of the homeowner/defendants is the increasing evidence that some loan originators sold off the promissory notes to more than one MBS bundler. So that there is the possibility the originator/original plaintiff (and assignor) has gotten paid more than once for the same loan. If the balance of equities gets evened out in this way, I think you'll see more strict compliance with contract law by the lawyers wearing robes, who of course are just lawyers who couldn't hack it in private practice but had political connections. As for the correction of the name of the plaintiff by ex parte motion, so long as the defendant could still defend the case on the merits I don't think this is particularly unusual.
the word Tranch does not exist. It has no etymology other than some drunk banker mispronouncing Trench , as in WW II trench warfare.
We're well on our way to Stalinism now.
Move to New Zealand.
-MobBarley
The dictionary that came with my puter says:
tranche - from Old French, 15th century, literally "slice"
to tranch: To slice a sturgeon.
"In structured finance, a tranche (often misspelled as traunch or traunche) is one of a number of related securities offered as part of the same transaction. The word tranche is French for slice, section, series, or portion. In the financial sense of the word, each bond is a different slice of the deal's risk."
Good evening folks. Almost happy hour time but I had to write up a short discussion on our blog:
Connected to the collapsing mortgage picture b/c of underwater home debtors and job losses. Did the IRS(we the people) provide CITI with a tax break to help with losses or do new lending?
http://thegreatloanblog.blogspot.com/2009/12/citi-given-irs-tax-break-re...
The markets (all of them) should rally on this news.
citi tax break, to finance bonuses, and payback tarp, and return arab deposits. weee and I didn't even take economics
Better Summary:
DAVID A. HAVENS (HEXAGON SECURITIES L)
*** Jumbo Mayhem *** Moody's -- $143bn on Watch
* Moody's has adjusted, for the worse, it loss projections for US Prime Jumbo mortgages. While not necessarily surprising, it does have widespread implications for all financial institutions who continue to dig their way out from the aftermath of the Credit Apocalypse.
* As it stands now, Moody's has 4,474 tranches of 2005 through 2008 Prime Jumbo RMBS deals on Watch Neative. This spans a pool with original loans balances of $234bn and current balances of $143bn
* Here's the new stuff:
- Moody's has noted an increase in serious (60+day) delinquencies:
> 2005 to 3.2% from 2.1%
> 2006 to 6.0% from 3.8%
> 2007 to 7.6% from 4.8%
> 2008 to 7.8% from 4.6% *** As percentages of ORIGINAL pool balances ***
* Moodys.com -- headed up by the terrific Mark Zandi -- expects home prices to drop by an additional 9% as the impending foreclosure overhang does its thing. This will result in a 37% national peak to trough decline.
* Zandi et al also expect unemployement to peak at 10.6%
* Here's some more new stuff from the Moody's RMBS team:
- Moody's estimates for serious delinquencies by 2H10
> 2005 to 3.7%
> 2006 to 7.0%
> 2007 to 8.4%
> 2008 to 9.4%
- Moody's estimates a roll rate (delinquent to deafult) of 88%
- And a loss severity of 50%
- And for delinquencies to decelerate for 2011 and beyond
- noting the abject failure (no shock there, sadly) of the government's
ill-conceived loan mod programs, Moody's has reduced the loan mod benefit to 5% from 15%
* Updated CUMULATIVE LOSS projections:
- 2005 vintage -- 3.8%
- 2006 vintage -- 8.0%
- 2007 vintage -- 10.9%
- 2008 vintage -- 12.3%
*** Bottom Line ***
It seems that we have all collectively been numbed to excrutiatingly painful numbers like the ones discussed above. But, they do have real implications for a wide variety of financial services companies. For example, if we see 8-9% default rates on Prime Jumbo mortgages when all is said and done, what are the implications for C, BAC, JPM and WFC -- not to mention the welter of smaller banks -- that all have huge porttfolios of second lien HELOCs and such??? How will the mortgage insurers get trhough this??? Their portfolios are even weaker than the stuff Moody's was jabbering about above. How's about life insurers???
They may not be as exposed, but some insurers do have goodly portfolios of private label securities. And finally the monolines......wither the monolines???
*** Bottom Botton Line ***
To combat this and other symptoms of the Credit Apocalypse, the central banks and governments around the worls have thrown $20 trillion plus of liquidity, stimuli, insurance wraps, facilities, buying programs etc at the problem. As
Terry Checki of the FRBNY said:
"And while we have come a long way since the dark days of last year, the history of this episode is still being written, and the recent celebration in markets seems oddly premature."
"We have been using experimental drugs on a rare disease-- and while the patient's vitals are improving, the sure could have important and long-term side effects that need to be closely monitored." (Thanks James Aitken of Aitken Advisors for bringing Checki's comments to my attention).
What a great article. I will share this information with anyone that needs it. It’s valuable, useful, and gives the kind of information that isn’t commonly found. I’m going back to see what else has been written on the topic. See our site for Loan Modification