HERE’S SOME LIGHT WEEKEND READING FOR YOU: 2,446 classes of residential mortgage backed securities, mostly fairly large credit Downgrades (several steps). Private label non-agency mortgage backed securities. Mostly Alt-A, some are sub prime.
How very timely of Moody’s to release this in February 2009 (along with this timely warning to the dinosaurs: Hey, look out for that asteroid!)
“Wednesday’s downgrade of 2,446 classes of mixed RMBS caught traders off guard – even though it was viewed as an eventuality. While the market had largely priced in below-investment grade ratings to alt-A bonds following Moody’s Investment Services’ announcement that it would increase loss assumptions, the swiftness with which the rating agency acted has traders bracing for even more supply.
While the market was already trading bonds to these higher loss assumptions, the banks and insurance companies that own this paper are now going to have to hold more capital against these assets, and the increase given that these bonds are now junk [rated] is not a small matter,” said one trader. . .
Moody’s warned in a report last week that loss assumptions would be increased for RMBS and that downgrades could be expected. Moody’s is projecting that alt-A deals originated in the second half of 2007 will experience 25.5% losses of original balance, compared to 23.9% of 1H07 deals, 22.1% for H206 deals and 17.1% for 1H06 deals. The rating agency in May expected average losses for 2006 and 2007 vintage deals to reach 11.2% and 14.7%, respectively.
Massive selling is not expected immediately though it is only a matter of time before a substantial portion of the downgraded bonds are put out to bid, a second trader said . . .”