Rating Agency's take a reality check

Well it took a while but the rating agencies are now having to admit that the toxic waste market, I mean the RBMS (Residential Mortgage Backed Securities) market is in some serious trouble. Yesterday the two largest rating agencies S&P and Moody's announced that they are downgrading billions of dollars worth of mortgage backed securities.

To be exact Standard & Poor's said it may downgrade $12 billion of subprime residential mortgage-backed securities (RMBS), while Moody's downgraded 399 RMBS.


Credit ratings on 612 classes of residential mortgage-backed securities backed by U.S. subprime collateral have been put on CreditWatch with negative implications, S&P said. Beginning in the next few days, the agency said most of these classes will be downgraded.

The agency said it's also reviewing ratings of Collateralized Debt Obligations (CDOs) that invested in the RMBS that could be downgraded.

S&P also said it's changing the way it evaluates those securities, partly because of unprecedented levels of misrepresentation and fraud, combined with potentially shoddy initial loan data.


Really? Fancy that, giving people loans who don't need any proof that they can afford them turned out to be not such a good idea. We kind of knew that already but I guess S&P are just slow learners.

S&P said it was taking action because losses on the mortgages underlying these securities have risen more than expected and now exceed anything that happened before.

Losses will probably increase as the U.S. housing market especially parts financed with subprime loans continues to decline before it improves, S&P said. Property values will decline 8% on average between 2006 and 2008 and that will exacerbate losses on subprime RMBS, the agency explained.

The resetting of adjustable-rate subprime mortgages and the end of low teaser rates on fixed-rate home loans will also increase subprime RMBS losses, S&P added. Tighter underwriting standards imposed by lenders will leave fewer refinancing options for stretched borrowers, the agency also said.

"The ongoing weakness in both national and regional property markets will exacerbate losses with little prospect for improvement in the near term," the agency said. "Also, many of these transactions will likely encounter additional credit stress from upcoming interest rate and payment resets."


Doesn't sound good does it? Hank Paulson's 'we have reached the bottom of the cycle' claim is all but a sick joke now.

Moody's said it downgraded 399 residential mortgage-backed securities because of higher-than-expected delinquencies on the underlying home loans. The rating agency also said it put 32 other RMBS under review for possible downgrades for the same reason.

The moves affect $5.2 billion of securities. That represents 6.8% of the securities rated by Moody's last year that were backed by subprime first-lien home loans, the agency noted.

New data show that delinquencies and foreclosures continue to accumulate, S&P reported. Total aggregate losses on all subprime RMBS transactions since the final quarter of 2005 have reached 29 basis points, versus seven basis points in 2000. (A basis point is one hundredth of a percentage point).

S&P used 2000 as a comparison because, until now, that was the worse year for subprime losses in the past decade.


So the previous worst year for sub-prime losses has not just been eclipsed it has actually been quadrupled and with more mortgage resets to come this won't be getting better anytime soon.


Alleged misrepresentations on credit reports were up significantly in 2006 and overall mortgage fraud has exceeded previous highs, S&P also reported.

The agency said borrower and loan data it used to rate RMBS may not have been accurate. That means important factors it analyzed to judge the risk of these securities such as borrowers' credit scores, loan-to-value levels and ownership status are proving less helpful in predicting performance, it explained.


It's not shaping up as the best week for markets with profit downgrades, RMBS downgrades and lacklustre retail sales due out on Thursday from US retailers. Click here for the full article from marketwatch.com