Saturday, April 17, 2010

Mortgage-Backed Securites Continue to Underperform

One would think that 5 years after the housing stocks peaked, it is past time for objective trends in mortgages to be well into the healing phase. Not so. "Default Servicing News" = has an article out today titled Moody's Downgrades $42.2 Billion of Subprime RMBS. Here are quotes from the article:

The performance of subprime loans made during the real estate boom continues to worsen, putting investors on an even bigger hook. This week, Moody’s Investors Service downgraded its ratings on a total of $42.2 billion of residential mortgage-backed securities (RMBS) made up of subprime home loans.

The agency said the downgrades are a result of “continued performance deterioration in subprime pools,” which is likely to worsen further as still-falling home prices and high unemployment trigger more defaults. The ratings actions reflect Moody’s updated loss expectations on subprime securities issued between 2005 and 2007. . .

Moody’s also alerted investors this week that it has downgraded $7 billion of RMBS backed by Alt-A residential mortgage loans made in 2005, again citing “rapid performance deterioration.” Alt-A is considered to be mid-grade risk, falling somewhere in between prime and subprime. . .

Last week, the New-York based ratings agency said it is also looking at possible downgrades on $50 billion in subprime RMBS issued before 2005, which would represent more than 80 percent of all subprime residential mortgage bonds from pre-2005 vintages.

Moody’s has also put $48 billion in Alt-A RMBS and $43 billion in prime jumbo RMBS issued before 2005 on watch for possible downgrade, signaling that deterioration among earlier loans has spread beyond risky subprimes.

I guess Moody's doesn't read the stock quotes.

The truth is that if the stock market were a real leading indicator, VerticalNet never would have been a hot stock, BofA stock would never have hit $3 only about a year ago, and Ambac and Fannie Mae would never have been priced to drop 99% or so in a short time from prices that had limited upside.

So despite a strong recent rally in Markit's listing of many commercial real estate-backed securities, Moody's comments on the much larger residential mortgage-backed securities bear watching.

How much longer will the Fed print money (if at all anymore) or the Feds borrow money to bail out bad residential loans? How much are the apparent yet worsening losses already reserved for by financial institutions? Why does David Rosenberg think that financials have the worst value to price rating of the industry groups he monitors?

After a huge rally in the stocks of the companies that caused the bubble, caution remains advised. Many are now trading well above tangible book value, which itself may be greatly overstated due to the extend and pretend status of their accounting.

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