Prime Jumbo MBS Downgrades From 1998?
A: Hat tip to Calculated Risk for bringing this one out to people's attention. Umm, one would think that the real questionable prime jumbo loans (at the height of the credit boom) were issued between 2005-2007 or so, before the securitization market decided to go the way of the dodo bird. To hear that we are getting downgrades on '102 classes from 33 U.S. prime jumbo residential mortgage-backed securities that were issued from 1998 to 2004', makes me wonder how deep this problem goes. Where were these guys marked? Oh what a tangled web we weave.
You may wonder why some of the holders as far back as 1998 may be defaulting if they saw the equity of their home skyrocket with the housing boom. Well, the answer to that would be MEW. How much did the homeowner cash out during the boom, and how did the subsequent fall in prices kill the LTV ratio for the homeowner? We all know how people used their homes as an ATM machine for at least 3-4 years, big time! Now the house is worth less, yet the debts remain. Couple that with this severe slowdown and rise in unemployment and pressure has been building on these once 'high quality' borrowers.
Prime Jumbo and the rest of the stuff sitting lord knows where on the banks balance sheets (helocs, credit cards, lbo's, commercial mbs, etc..), are all part of my concerns over a 2nd wave of writedowns, capital raising, activation of the planned toxic junk-disposal programs, etc..Just be prepared thats all. The banks raised a lot of money with this equity rally, and got some earnings behind them from Q1. This could help capital ratios and TCE for a bit longer. But ultimately we will have to face the music on the higher quality debt classes and other types of debt that are still sitting there, rotting away.
From Marketwatch.com, "S&P downgrades prime jumbo mortgage securities":
S&P said it lowered ratings on 102 classes from 33 U.S. prime jumbo residential mortgage-backed securities that were issued from 1998 to 2004. The rating agency also affirmed ratings on 669 classes from 32 of the downgraded deals, as well as 34 other deals.Careful about that complacency thing setting in that this credit crisis is over."The downgrades reflect our opinion that projected credit support for the affected classes is insufficient to maintain the previous ratings, given our current projected losses," S&P said in a statement.
Prime mortgages were originally thought to be less vulnerable to housing cycles. Home loans offered before 2005 -- when the lending binge really took off -- were also considered more solid. But the rapid increase in unemployment has undermined these assumptions.
Comments (6)
Noah, Great piece, you beat me too it. The Jumbo downgrades jumped out at me as well. I would not say that this information was not in the market at all, certainly people have been talking about both jumbo mortgages and "higher value" homes in general now being on the firing line. But concerns of guys like T2 partners who see a second act of the financial crisis coming, certainly bear watching and as Urban Digs readers know, bank delinquencies on residential mortgages they have kept on balance sheet (presumably the good stuff) have continued to go ballistic (no exaggeration). What's worse these delinquencies are being joined by credit cards, commercial real estate loans and now C&I loans. I just don't see how things turn the corner until this stuff is resolved. At the same time that the jumbo downgrades caught my eye so too did the recent issuance of credit card ABS deals.....sans TALF help.... by I believe JP Morgan and Morgan Stanley. I actually think these two things are not mutually exclusionary. Anyone who is still being extended credit card debt capacity is probably a great credit and should be lent to....and the spreads are likely very appealing to investors. If we start to see these species of green shoots get plowed under get really worried...I'm still worried as it stands.
Posted by jeff | June 23, 2009 7:49 PM
"At the same time that the jumbo downgrades caught my eye so too did the recent issuance of credit card ABS deals.....sans TALF help.... by I believe JP Morgan and Morgan Stanley. I actually think these two things are not mutually exclusionary."
what did you find? link? post?
Yea I knew you would be all on this one, and its strange how comments are minimal on these types of discussions. I wonder if people are sick of talking about the credit crisis and the fact that we may have another wave. Reality vs Perception i guess. People had enough, too much pain, talk of another wave is outright boring and unpopular. Like talking about the impending deflationary episode in late 2007, and after Bear Stearns when people though the fed cold save the day. The markets just need to work itself out. Naturally. We need to stop hiding and get it over with and addressed. At this point, I think the fed/treasury are hoping for an orderly deleveraging process, nothing chaotic or systemic.
Posted by Noah | June 23, 2009 9:26 PM
"I wonder if people are sick of talking about the credit crisis and the fact that we may have another wave."
Regardless as to whether your readers are RE bulls or bears, most are long stocks. The market has dished out massive pain this past year and the relief(bear)rally was a welcome replenishment. This post is not good news for stocks, along with other ominous signs, and we stand a good chance of re-testing the March lows. Best to hide under a rock.
Posted by cfranch | June 23, 2009 9:57 PM
People just need to readjust their expectations with Bill Gross' "new normal." But damn, thanks for the tip Noah. Here I was kicking myself for not buying bank debt back when people were thinking armagedon and Ben was showing just how much a ginormous fiscal prop he could use to keep them from defaulting. But this? This is scary. All the way back to 1998 makes me worry about what will happen to like vintage MBS with all the layers of leverage people might have taken out on their personal incomes.
Posted by MeekSheep | June 23, 2009 11:32 PM
There are strong odds of having a second wave of write downs in this credit crisis.
Posted by Johanne | June 23, 2009 11:46 PM
I am not sure that people are bored about talking about the credit crisis, but I must say my interest has waned in commenting here and on other boards like Calculated Risk since the housing market is now dropping as was predicted.
It was much more interesting to talk about the market when it was behaving irrationally and there was a great deal of uncertainty about what was going to happen.
Posted by Kevin | June 24, 2009 1:40 PM