Moody's Expects Higher Losses on Alt-A and Other RMBS

ResearchRecap has been tracking the worrisome performance of Alt-A mortgages for some time, so it comes as little surprise that Moody’s is increasing its loss assumptions for these supposedly “close to prime” loans, along with Jumbo, Option ARM, and Subprime RMBS from 2005-2008.

Moody’s said it now expects that a trough in home prices will not be reached until the middle of 2010.

The impact of the revisions is expected to be significant for Alt-A, Option ARM, and some Jumbo pools backing securitizations from 2005-2007, with the most pronounced changes expected for the 2005 pools.

Performance has deteriorated significantly in the last six to nine months, with loss severities trending higher than Moody’s previous expectations. The impact will be less pronounced for Subprime, but still notable for the 2005 pools.

Other highlights:

• Since the first quarter of 2009, when Moody’s last announced revised lifetime loss expectations for the major RMBS sectors, several key economic indicators and performance metrics have worsened relative to expectations. Even though the Case-Shiller index reported home price gains for three consecutive months starting in June, Moody’s believes the overhang of impending foreclosures and the continued rise in unemployment rates will impact home prices negatively in the coming months.
• Moody’s Economy.com (MEDC) now forecasts a third quarter 2010 home price trough. When Moody’s last revised RMBS loss projections the trough was projected to occur at the end of 2009. MEDC projects a total peak-to-trough decline of 38% (versus 35%), compounded by muted subsequent home price growth of less than 5% in the year following the trough. Although the magnitude of forecast peak-to-trough decline has only worsened by 3 percentage points, the extended timeline will have an adverse impact on mortgage pools and stressed borrowers will continue to default at high rates.
• Adding to borrowers’ financial pressure, unemployment is now projected to peak at over 10% in mid-2010 and to remain in the high single digits for two years following.
• Borrowers’ refinancing options are still slim, and the benefits of loan modifications have yet to be seen due to the 5-month trial period during which modified loans must be reported as delinquent. In addition, modifications of loans owned by the GSEs have outpaced modifications of loans owned by private-label securitization trusts

Comments

[KirbyJF1:]

Do you really trust Moody's? Aren't these the same people that gave all the AAA ratings to many of the sub prime loans??

Did you see that Warrnie Buffet is like a rat getting off a sinking ship?

Kirby

Oct 31 01:42 PM

[Gary A:]

It isn't just Moody's, but also Goldman Sachs who is predicting a decline in housing values. The pressure of deflation here is enormous. Of course I have advocated walking away from loans where practical, as a means of securing a sound family balance sheet. After all, I have argued here hubpages.com/hub/It-Is... that the government wants us to spend, spend, spend.

Since they are not letting the banks restructure our debt or pay less on credit cards, the only way we can spend more is to walk away from our bad ponzi, loan sharking loans. It is, after all, the patriotic thing to do.

Tell you a secret though. Don't spend the extra, but put it under a mattress for a rainy day. That day may be coming in the world of US economics.

Oct 31 02:36 PM