China Stimulates, $34Bln Alt-A Securities Downgraded

A: With China stimulating their economy and the globe right now, we have to wonder if this is more economic Cialis? What happens after the 36 hours are up? This is $586Bln less that is available to buy up our treasuries as we issue massive supply to fund our own rescue. As I said before, this is not a subprime problem. Subprime seems small when compared to the number of near prime (alt-a) and prime mortgage backed securities held on the books of the financials. You see, as the rating agencies downgrade these securities, the firms that hold them are forced to raise more capital to meet requirements resulting from the downgrade OR sell them off completely because they can only hold 'AAA' rated securities. In this environment, that can be very difficult and result in forced selling of assets to raise the needed cash internally. Last Thursday, S&P downgraded some $34.1Bln of ALT-A Residential Mortgage Back Securities and warned in mid October that it may cut ratings on as much as $351Bln of Alt-A securities; which leaves about $300Bln left to go.

Via Housingwire.com:

Standard & Poor’s Ratings Services said late Wednesday that it had cut its ratings on 1,078 classes from 86 U.S. RMBS Alt-A deals issued in 2006 and 2007 — the latest blow to investors in an already battered mortgage market, and evidence that the nation’s mortgage crisis is moving up the proverbial value chain. In aggregate, the classes with lowered ratings had an original par amount of approximately $34.1 billion, which has been paid down to approximately $28 billion, S&P said.

The cuts should hardly be a surprise — S&P had warned in mid-October that it may cut ratings on as much as $351.7 billion of Alt-A securities.

S&P’s analysts said that as of the Sept. 2008 distribution period, severely delinquent loans for affected transactions average a little over 13 percent of current pool balances — an increase of almost 30 percent in just one quarter. For anyone familiar with Alt-A deals, those should be stunning numbers, worth repeating: more than 13 percent of remaining loans are 90+ delinquent, in foreclosure, or held in REO. This number is so damaging, in particular, because Alt-A transactions were comparatively thin on credit enhancement relative to their subprime counterparts: a weighted average FICO of 700+ had a way of convincing everyone these deals would perform.

Anyone thinking that the worst is behind us for the financials needs to understand the scope of the problems here and why the government & fed are intervening on such grand levels. This is some serious stuff.

What do these downgrades mean? Bloomberg states it best:

Securities downgrades may boost the capital needs of holders such as banks and insurers, and force some investors to sell debt. Rating companies have been stepping up downgrades on mortgage bonds backed by loans other than subprime or second mortgages amid tumbling home prices and soaring late payments.

The prime,alt-a jumbo story is still being written. We were sold the TARP program as one that will buy up distressed assets and recapitalize the banking system so lending can resume. Well so far AIG is eating up twice as much funds as originally thought needed, and $250Bln of the $700Bln was used to inject capital into the banks directly. Which leaves only about $350-$450Bln left for distressed asset purchases; not nearly enough. Fannie Mae just announced $29Bln in losses this quarter & AIG announced $24.5Bln in losses.

Mort Zuckerman, CEO of Boston Properties, on a Bloomberg interview, (video link in Related Video on right side of page & well worth the 10 minutes) tells us the harsh reality:

"...The financial crisis is going to feed into the real economy resulting in an adverse feedback loop, back into the financial economy. This is the biggest wipe-out of financial wealth in our history, and nobody knows what the effects of it will be.

The only accomplishment that we (TARP) have had so far is that its prevented some major financial institution from falling into a trap door and disappearing in 72 hours; by the way, that is not an insignificant achievement because if that happened it would crash the whole level of confidence in the financial world. It was ridiculous to have presented that (TARP) as something that would increase lending on the part of banks, WHY? Because #1 the borrowers credit has not improved in all of this, and there is no point in the banks to have make a whole series of additional bad loans and re-create this mess...

Unfortunately, they sold it (TARP) to the American public on the grounds that the money would be used for lending. Every bank I know is reducing their lending book! The financials own book, their own portfolio of loans are in much worse shape than they have us understand. Nobody knows how bad this is. Nobody knows how bad the loans are that the banks already have on their books. They are low interest rate loans, they cant get out of them, and they have to protect their own basic financial situation, and I understand that. Its just that the Treasury & the Administration for political reasons sold this (TARP) on untrue grounds."

There is a ton of truth to those statements and the entire video is worth watching! Which begs the question, is $700Bln going to be enough? IMHO, no way! As global economies stimulate to help their own people, where does this leave us? We are going to spend $700Bln to save the financial system and not create any more jobs, or repair our aging infrastructure. Which makes me believe that we have a few more stimulus packages in the works for 2009! At some point, this becomes real money.