S&P Doing The Nasty On $280 Billion In Alt-A…Largest Ever

S&P remains ahead of the impending Alt-A and Jumbo Prime Implosions with their largest potential downgrade ever. Just to clarify, Alt-A is mostly limited documentation products and the now infamous Pay Option ARM. Jumbo Prime refers to prime loans with amounts over the Fannie/Freddie conforming limits including loans such as the 5/1 Interest Only.  Wells Fargo Bank (WFC), Chase (CCF), Citi (C) and Wachovia (WB) were among the highest volume large-named Jumbo Prime and Alt-A lenders in the nation.

This week, S&P in their largest and most sweeping effort to date, dropped the bomb on Alt-A, the segment leading the mortgage crisis out of the first quarter (subprime) and into the second. However, this action is not necessarily targeted at ARMs and Pay Options, rather “loans with at least five years of fixed rates”, S&P said. This is big news.

This most recent S&P action hit $280 billion and comes just two months following another massive sweep of both Alt-A and Jumbo Prime (see Mr Mortgage report links). $280 billion is approximately 15% of the total Alt-A universe.  I am aware that $280 billion hardly seems like news any longer, but many banks still hold Alt-A and Jumbo Prime MBS/whole loans on balance sheet due to their previous high ratings.

The raters are finally understanding the ominous impact that negative equity has across all loan types and borrower grades. Negative equity knows no bounds.  While factoring in the unprecedented home price deprecation seen in the past 12-months and projecting that out, they are discovering that those who purchased or refinanced with cash-out as early as 2003 are now under water and at an exponentially greater risk of default.  In your harder hit areas, prices are at decade lows and those in a negative equity position are the majority.

Even those who purchased much earlier and put a second mortgage on the property may be in a negative equity position.  This is making their modeling systems ‘TILT’.  Due to this I believe we will see some serious ratings actions over the next few months stretching deep into the heart of the ‘Prime’ loan sector. Stay Tuned.

If you have the time, below are links to my most recent Alt-A and Jumbo Prime downgrade stories a couple of months back.  This will give you the full scope of how hard these segments have been hit.

S&P Reviews $280.1 Billion of Alt-A Mortgage Debt (Update1)
Oct. 15 (Bloomberg) By Jody Shenn

Story Highlights

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.

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.

Securities downgrades may boost the capital needs of holders such as banks and insurers, and force some investors to sell debt.

“There has been a persistent rise in the level of delinquencies among the Alt-A mortgage loans supporting these transactions,”

Foreclosures, Distressed Sales

Loans at least 90 days late today totaled 13.1 percent of the balances as of September, up 27.6 percent from June.

Loss severities will be higher because property prices will probably fall further.

Ratings companies downgraded about $118 billion of prime- jumbo and Alt-A bonds last month, including $90 billion of top- rated debt.

On Oct. 6, Moody’s Investors Service put $110 billion of prime-jumbo mortgage securities under review for downgrades.

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