S&P Downgrades Four-Month-Old Repackaged Mortgage-Backed Securities

Just saw this post on Zero Hedge about a downgrade of a recent Re-REMIC issue by Standard & Poor’s. Re-REMIC’s are repackaged mortgage-backed securities of a supposedly more secure pedigree as they were to have been constructed of securities identified to be of better quality and thus less likely to default.

Now, just 4 months after the issue of these securities, S&P has downgraded them citing “significant deterioration in the performance of the loans backing the underlying certificate” and referring to said deterioration as “severe”. How in the world are these ratings guys staying employed? More importantly, how in the world are the investment bankers finding buyers for these issues?

After everything that has gone down in the last year, you would think that any mortgage-backed security offered would be so heavily scrutinized as to actually be relied upon to perform over the long-term. What you most definitely would not expect is for the securities to be downgraded just a mere 4 months after issuance.

Right now there are a lot of people blinded by an overly optimistic view of our financial markets. I for one do not share these beliefs and fear we are experiencing a rebound bubble. I expect we will see another correction in the market as investors sell to take profits. I personally sold everything yesterday morning because the amount of gains (or more appropriately stated as returns to prior gains) I experienced in such a short time seem counter-intuitive when juxtaposed against the core underlying fundamentals of the world economy. The fattest pigs get slaughtered. I’d rather leave a couple dollars a share on the table and pocket the 50% – 100% gains we’ve seen since March.

Zero Hedge closes their post with this:

That’s ok. Investors in the Re-REMIC will promptly brush this off as they prepare for not debt but equity investments in IPOs of companies that invest in just such comparable loan pools. Bernanke’s moral hazard bubble is the guiding light as always.

So true.

Comments

[John McLeod:]

"... how in the world are the investment bankers finding buyers for these issues?"

That one's easy, they found a buyer who prints his own money. SIFMA blessed Re-Remics into the TBA market in January, and the very next day the Fed started its 8-month-long buying spree of residential RE debt, presently sitting on a Freddie Mac sized $693.6 billion pile of mortgage-backed securities.

Who did you *think* was buying this stuff? It shoor weren't nobody named Bill or Mohamed!

Sep 24 08:15 PM