Alt-A Checkup: Is Near Prime Next?

A: I do not want to ruin the early party that seems to be going on at wall street after UBS announced a staggering $19Bln write-down & Deutsch Bank announced $4Bln in write-downs; stocks seem to be betting that the end may be near!! However, I want to point you in the direction of a daily must read blog, Mish's Global Economic Trend Analysis, for today's discussion. Many of us do not have bloomberg terminals or access to front line information that many traders and investment banks have. But Mish shares with us the progression of deterioration in Washington Mutual's Alt-A books. This is consistent with discussions on UrbanDigs and elsewhere regarding the spread of problems to higher quality debt classes. This is not just a subprime problem.

As stocks figure out whether bad news is already priced in, my eyes are still on the credit markets and the spreading of delinquencies to other debt classes. Mish's blog gets down & dirty on WaMu's Alt-A mortgage pool and shows us what has been happening in the past 90 days; the trend is it's getting worse! In this credit world of no transparency, this is the first time I have seen a blogger go into this kind of detail of a bank's mortgage pool.

According to Mish's article, "WaMu Alt-A Pool Deteriorates Further":

I have been tracking a particular WaMu Alt-A mortgage pool for a couple of months. The pool is known as WMALT 2007-0C1.

January Pool Stats

* 19.3% 60 day delinquent or worse
* 13.15% Foreclosure
* 1.83% REO

February Pool Stats

* 22.69% 60 day delinquent or worse
* 11.62% Foreclosure
* 3.56% REO

March Pool Stats

* 25.3% 60 day delinquent or worse
* 13.35% Foreclosure
* 4.44% REO

Note the above progression. This cesspool from May of 2007, was 92.6% originally rated AAA, even though loans had full doc only 11% of the time. In less than one year, the pool was 25.3% 60-day delinquent or worse. Of that 25.3%, 13.35% is in foreclosure and 4.44% is bank owned real estate.

Obviously the stat that pops out to me is the rise in '60 Day Delinquency Rate or Worse' from January to March. This is real people. Mish then goes on to discuss how Moody's downgraded the ratings of 279 tranches of 27 Alt-A transactions issued by Lehman Brothers; with an additional 97 tranches placed on negative watch (story).

I am not looking at the stock market as a sign of the health of the credit markets or delinquency trends and whether the problem is spreading; this is a very volatile market and you will see big swings both up & down. I just question how strong this rally could really be when we see info like this, and headlines like the following:

Deutsche Bank to Write Down Record 2.5 Billion Euros (Bloomberg)

Deutsche Bank AG, Germany's biggest bank, will write down 2.5 billion euros ($3.9 billion) of loans and asset-backed securities and said markets are deteriorating.

"Conditions have become significantly more challenging during the last few weeks," Deutsche Bank said today in a statement.

Leveraged Loans Fall by Record as Bank Losses Deepen (Bloomberg)

Prices for high-yield, high-risk loans in Europe dropped by a record in the first quarter, causing bigger losses for banks and hedge funds. Investors have abandoned the market for leveraged loans on concern corporate defaults will rise because of higher borrowing costs triggered by the U.S. subprime mortgage crisis. Banks in Europe are holding 58 billion euros of loans they planned to sell, according to Standard & Poor's.

"What's largely driven the deterioration is forced selling by hedge funds and market-value funds," said Paul Watters, head of loan and recovery ratings at S&P in London. "Some banks are doing what they are required to do by marking their portfolios to indicated secondary market levels. For now, those are largely unrealized losses."

Banks Face Biggest Crisis in 30 Years, Report Says (Bloomberg)

Credit market turmoil poses the most severe crisis for banks in 30 years, surpassing Black Monday in 1987, the Asia currency crisis and the burst of the dot-com bubble, Morgan Stanley and Oliver Wyman said in a joint report.

Revenue from investment banking may drop 20 percent in 2008 before a further $75 billion in markdowns, analysts led by Huw van Steenis said in a note to clients today. "The industry is facing the most severe investment banking crisis in 30 years," the analysts wrote in the report. "Global securities markets are in the midst of profound cyclical and structural change."

What are we really celebrating here? $23Bln in write downs and Lehman selling $3Bln in preferred stock when the CEO states there is no liquidity problem? Cmon now, is anyone else tired of this? Lets at least keep a straight head about what is still going on out there.

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