Moody’s has issued details of its methodology for its recent increase in loss projections for US subprime and Alt-A residential mortgage backed securities (RMBS) issued between 2005 and 2007.
Moody’s last month revised lifetime loss projections for US subprime RMBS issued between 2005 and 2007. On average, Moody’s now project cumulative losses of 19% of the original balance for 2005 securitizations, 38% for 2006 securitizations, and 48% for 2007 securitizations. For Alt-A Moody’s projects cumulative losses of 14% for 2005 securitizations, 29% for 2006 securitizations and 35% for 2007 securitizations.
A few tidbits from the reports:
As a result of dropping house-prices, over 56% of subprime loans and over 58% of Alt-A loans in Moody’s rated securities are currently under-water.
- After increasing starkly in 2008 (from the mid-40s to the mid-60s), loss severities on subprime pools stabilized in 2009. As of December 31, 2009, severities across all vintages were approximately 70%. We expect severities on subprime pools to rise slightly as we reach the home price trough, but improve thereafter. As a result, we expect lifetime severities to average around 70%.
- After increasing through the first half of 2009, loss severities on Alt-A pools have since stabilized. As of December 31, 2009, the three month averages for 2005, 2006, and 2007 severities were approximately 53%, 59%, and 59%, respectively, an increase, in absolute terms, of 8-13% from a year ago. We expect severities on Alt-A pools to remain largely stable at the higher levels.
- Recent government efforts to curb defaults and foreclosures through loan modification have thus far failed to gain the previously expected traction. The updated loss estimates incorporate approximately 5% for subrime and 2% for Alt-A relative benefit to projected losses across vintages to reflect the limited anticipated success of the program.
For details, see Subprime RMBS Loss Projection Update: February 2010 and Alt-A RMBS Loss Projection Update: February 2010 (Premium)
Technorati Tags: Alt-A, housing, mortgage defaults, mortgage modification, residential mortgage-backed securities, RMBS, structured-finance, subprime
As U.S. home prices show early signs of stabilization, so are subprime asset values, according to a new Fitch Index of US subprime assets.
Fitch’s total market U.S. subprime Index stood at 8.34 as of Sept. 1. Though higher than the all-time low of 7.27 on May 1, the index is still significantly lower than the opening value of 42.56 on Nov. 1, 2007.
In general, the synthetic subprime market is still seeing more activity than its cash equivalent and hence can be used as an effective proxy for asset values – Fitch Managing Director Thomas Aubrey.
Fitch Solutions says its five new indices, which are presented as cash prices, provide a total market view of all vintages as well as vintage specific indices thus providing a broader insight into the US subprime market.
The indices will be made available within Fitch Solutions ABCDS pricing service (Subscription required) which provides consensus pricing for credit default swaps of asset backed securities (ABCDS) with a complementary benchmark service to provide a derived price for illiquid assets.
Coverage includes:
Residential Mortgage Backed Securities (RMBS)
Commercial Mortgage Backed Securities (CMBS)
Credit Cards
Automobiles
CDOs
U.S. RMBS Subprime Indices
Technorati Tags: asset-backed-securities, auto loan ABS, CDS, commercial mortgage-backed securities, credit card debt, credit-default-swaps, residential mortgage-backed securities, structured-finance, subprime
Total additional losses from legacy US Residential Mortgage-backed Securities are expected to reach $260 billion: $165 billion from subprime, $90 billion from Alt-A, and $5 billion from prime RMBS, according to Standard & Poor’s Market, Credit, and Risk Strategies group (MCRS).
In a worst-case economic scenario, total losses could reach $375 billion: $235 billion from subprime, $132 billion from Alt-A, and $10 billion from prime.
MCRS, an independent group within S&P, reviewed the total amount of private-label (not issued by Fannie Mae or Freddie Mac) residential mortgage-backed securities (RMBS) outstanding, as well as their current performance record. Their findings:
- With more than $4 trillion in mortgages securitized since 2004, the legacy assets remaining on the balance sheets of banks continue to unwind themselves through repayments and defaults with a total remaining balance of $2 trillion.
- Prime, Alt-A, and subprime structured RMBS transactions totaled $3.7 trillion in issuance since 2004 and through repayments and defaults, the outstanding balance remains at $1.7 trillion.
- The MCRS group expects total additional losses from the legacy assets to reach $260 billion: $165 billion from subprime, $90 billion from Alt-A, and $5 billion from prime RMBS. In a worst-case economic scenario, we would expect $375 billion in total losses: $235 billion from subprime, $132 billion from Alt-A, and $10 billion from prime.
- Given that the securitized structures assumed a certain loss percentage before equity tranches began to suffer losses, even relatively low nonperforming balances in prime mortgage structures would be damaging to equity-tranche investors.
- A total of $250 billion in loans is in bankruptcy, foreclosure, or REO, though banks will recover a percentage of these balance through the sale of properties, but these properties will keep home prices depressed.
For full details see Putting A Dollar Value On Legacy RMBS Losses
Technorati Tags: Alt-A, bank bailout, credit-crisis, loan losses, mortgage-backed-securities, RMBS, structured-finance, subprime
NERA Economic Consulting has published another useful primer, this time on the complexities of loan modification programs. It does not take a position, but clearly lays out the issues and the pros and cons of various alternatives.
NERA analyzes 5 complexities:
- The incentive to default to qualify
- Moral hazard and adverse selection
- The risk of redefault on modified loans
- Potential conflicts of interest between servicers of mortgage-backed securities and investors in these securities
- The reputational effect for lenders and servicers
The report includes an ominous chart illustrating the rising trend of redefaults. It shows that more than 50% of loans modified in the second quarter of 2008 had redefaulted after 5 months.
The concerns about redefault are frequently supported by statistics examining recent history.
“…of the loans modified in the first and second quarters of 2008, after three months, 36-39% of the borrowers had redefaulted by being more than 30 days past due. After six months, the rate was 51-53%, climbing to nearly 58% after eight months.”
For details see Understanding the Economic Complexities of Loan Modification Programs.
Technorati Tags: credit-crisis, loan modification, mortgage defaults, mortgage delinquencies, primer, subprime
NERA Economic Consulting has a new working paper chronicling the history of the credit crisis. In typically clear-eyed fashion, NERA avoids any simple answers but identifies a confluence of contributory factors, illustrated with compelling charts.
A few highlights:
Opposing trends in housing prices and cost of credit led to a surge in subprime and other types of mortgage originations and securitizations until the deceleration occurred by the end of 2005 and beginning of 2006.
Starting in early 2000, housing prices adjusted for inflation began to increase to levels far exceeding the trends in rent and building costs, a key contributing factor to the current distress in the mortgage markets.
A $100 investment in the 07-01 BBB ABX (Credit Default Swaps) index in January 2007 was worth $5 in September 2008. This drop in value suggests significant losses on the underlying collateral that have not yet completely materialized.
NERA concludes by saying that “even after the credit crisis is over, it is not clear that the financial markets will ever be the same again.”
The free paper How Did We Get Here? The Story of the Credit Crisis is well worth a read.
Technorati Tags: credit-crisis, credit-default-swaps, housing, mortgages, subprime
Research Recap’s most viewed posts, attracting thousands of visitors, reflect the credit crisis that spread from the subprime mortgage meltdown throughout the US financial system and into markets and economies worldwide.
All of the top 10 posts and 19 of the top 20 were related to the credit crisis, and it was not until number 26 that a more positive post made the list.
Interestingly, some posts from early in 2008 remained well-read throughout the year as readers tried to make sense of the deepening credit crisis, particularly primer posts like the Research Primer on Credit Default Swaps and the IMF analysis of the role of hedge funds in the subprime crisis.
Research Recap’s Most Read Posts of 2008 were:
1. Warning Signs Seen in Rising Credit Card Delinquencies
(CreditSights – Mar 27)
2. Lenders Slow to Address Florida Mortgage Defaults
(Barrons - Apr 21)
3. Role of Hedge Funds in Subprime Crisis Examined
(International Monetary Fund – December 2007)
4. US Mortgage Insurers’ Troubles May Worsen
(Fitch Ratings – Jul 17)
5. 2007 Worst-Ever Vintage for US Subprime, Alt-A RMBS
(Standard & Poor’s Ratings Service – May 23)
6. Research Primer: Credit Default Swaps
(Fitch Ratings – Jan 14)
7. Alt-A Borrowers Looking More Like Subprime than Prime
(Fitch Ratings -Jun 2)
8. Global Junk Bond Default Rate Doubled in First Five Months
(Moody’s Investors Service – Jun 10)
9. Subprime-Related Litigation on the Rise
(NERA Economic Consulting – Jul 15)
10. What Lies Behind Higher US Negative Equity, Default Rates
(Bank for International Settlements -Dec 9)
With the credit crisis far from over, we would expect it to be a prominent topic again this year. With a new administration in place in Washington, we also expect to see infrastructure and greentech emerge as hot topics.
Click here to see The Top Posts of 2007.
Technorati Tags: Alt-A, asset-backed-securities, corporate bonds, credit card ABS, credit-crisis, credit-default-swaps, credit-markets, delinquencies, Hedge-Funds, junk-bonds, litigation, mbs, mortgages, negative equity, structured-finance, subprime, top posts, Zeitgeist
The OECD calls for a “dramatic” overhaul of US financial regulation in its just-released Economic Survey of the United States 2008.
” While some progress has been made through informal and incremental cooperation agreements (memoranda of understanding) among regulators, in the longer term a more formal and dramatic process, such as that outlined in the Treasury blueprint, is likely to be necessary,” the OECD says.
“The Treasury blueprint provides a sensible starting point for addressing these weaknesses, with a proposal to consolidate the current system around three regulators: a market stability regulator responsible for overall financial risks potentially impacting the real economy; a prudential financial regulator responsible for the supervision of individual institutions, notably those benefiting from a form of government guarantee and therefore prone to moral hazard; and a business conduct regulator responsible for enforcing business related rules, notably protecting consumer interests.”
“However, the framework does not address explicitly whether it would be desirable to regulate financial institutions that are currently subject to no, or less demanding requirements, but may be or may become systematically important, notably hedge funds and private equity firms. The prudential supervisor needs to have authority over all systematically important institutions and all institutions that have access to the central bank’s credit facilities. The market stability supervisor, if it is separate from the prudential supervisor as the Treasury blueprint proposes, needs extensive access to financial sector data to be able to arrive at an independent judgment regarding systemic risks…. The market stability and the prudential regulators could be unified within the central bank (as in the Netherlands) which already has considerable responsibility in this area through monetary policy and as lender of last resort to the financial system. An argument can also be made for an independent market stability supervisor (as in Australia or the United Kingdom) to ensure focus on supervisory issues and avoid possible conflicts between monetary policy and prudential concerns.”
The OECD’s recommendartions:
- The new regulatory structure should feature unified supervision in line with the current business model adopted by financial conglomerates.
- The market stability supervisor, whether a separate institution or not, should have access to sufficient information to assess macroeconomic risks and have the tools to promote corrective action if needed.
- Financial institutions should hold capital against off balance sheet risks and assets held in so-called trading accounts.
- In order to foster competition and reduce moral hazard, the two government-sponsored enterprises should no longer have access to preferential lending facilities with the federal government; be more tightly regulated and subject to the same regulation and supervision (including capital adequacy requirements) as other issuers of mortgage-backed securities; and divided into smaller companies that are not too big to fail. This would imply that, in due time, new debts issued by privatized GSEs would be explicitly not guaranteed.
Technorati Tags: credit-crisis, financial-regulation, GSE, Hedge-Funds, private-equity, subprime, Treasury, United States
U.S. policy-makers have taken bold steps to correct the credit crisis, including injecting capital directly into U.S. banks, but it may not be enough to avoid prolonged stagnation similar to Japan’s so-called “lost decade,” according to Standard & Poor’s Ratings Services.
The bursting of Japan’s economic bubble in 1992 took 12 years to solve, due to a combination of inadequate early action to shore up Japanese banks’ capital and prolonged economic weakness that kept the bad loans coming. The following chart shows the frustrating persistence of Japan’s real estate weakness.
S&P’s Naoko Nemoto writes in “Japan’s Lost Decade Offers Lessons for Current Global Turmoil” that governments in the current crisis so far have taken broader and faster action than the Japanese government did in the 1990s, which is clearly a good thing. But the underlying housing and industrial problems remain.
Given that the current financial crisis is having a bigger impact on economic activities over a wider geographical area, governments need to take more drastic corrective action to boost economic growth and stabilize the financial system than Japan did.
In “How Today’s Turmoil Will Shape Tomorrow’s Markets,” S & P points out that while U.S. policymakers understand Japan’s mistakes of the early 1990s, that doesn’t mean they know what steps are the correct ones to avoid years of stagnation.
Technorati Tags: bank capital, bank credit, banking, credit-crisis, global crisis, global turmoil, japan, Japan recession, recession, subprime, U.S. banks, US-economy
Fitch Ratings is raising questions about Japanese banks, especially as Japan’s economy has slid into recession and bank share prices have plummeted. Profits are being crimped by the high cost of credit.
From March to September, profits for major Japanese banks was JPY475 billion, or less than half the level for the same period in 2007, Fitch said. The ratings agency is concerned about capital ratios slipping and about banks’ exposure to leveraged buyouts.
On the bright side, Fitch points out that Japan’s banks have very little exposure to the global subprime fallout and that as of Sept. 30, their combined exposure to overseas asset-backed and commercial mortgage-backed securities was a slim 20 percent of Tier one capital.
Fitch has already downgraded the Individual Ratings of the three megabanks Mizuho, Mitsubish UFJ Financial Group and Sumitomo-Mitsui Financial Group. Their IDRs remain at ‘A+’, as Fitch believes their default risk remains low given their large size, extensive domestic franchises and strong potential for state support should this be needed.
For other banks negative rating actions are possible depending on the impact of the financial crisis and the faster-than‐expected deterioration in their risk profile.
For details, see “Japanese Major Banks: Semi-Annual Review and Outlook.”
Technorati Tags: bank capital, bank credit, banking, credit-crisis, global crisis, global turmoil, japan, Japan recession, Japanese banks, Mizuho, MUFJ, recession, SMFG, subprime
The soon-to-be Not-so-Big Three US automakers have succeeded in capturing the zeitgeist, if not much else, in another week that belongs in the annals of “you can’t make this stuff up.” The “leaders” of GM (NYSE: GM), Ford (NYSE: F) and Chrysler practically begged to be patted on the back for their meaningless stunt of driving one of their few fuel-efficient vehicles from Detroit to Washington for their latest appearance in The Greatest Bailout Ever Sold. A more suitable penance would have been for them to travel in the middle seat of the economy section of a near-bankrupt commercial airline.
After displaying the requisite amount of contrition, it now appears likely that the automakers will get $15 billion or so to keep them on life support for a couple of months. Few think they deserve it, but fewer still want to contemplate the consequences of them folding, even if those consequences might be somewhat less catastrophic than advertised. The overwhelming preponderance of news coverage and pontificating seems to assume that without the bailout, the entire Detroit auto industry will be vaporized with the loss of millions of jobs. More likely is that a significantly smaller but more viable industry would emerge.
Detroit’s problems have been known for years, but successive management teams have failed to address most of them. Rather than cutting back on the excessive number of brands, Detroit has added more and muddled the images of most of them. Who needs Mercury (other than the dealers), a brand of Ford clones supposedly aimed at women? Who needs watered-down Dodge versions of Jeeps, one of the few quintessentially American vehicles left? And how did GM turn Saturn, “a new kind of car company” into the old Oldsmobile?
What’s depressing about the latest bailout is that it is almost certainly lost money. Similar efforts to save the British-owned car industry through government intervention failed to save the makers of the eponymous Mini, now brought back to vigorous life by a German company. But there is still a significant auto manufacturing industry in the UK, it’s just not British-owned. Ironically, a big slice of it is owned by Ford and GM.
The automakers had the good fortune to be asking for help on a day when the loss of over half a million jobs in a single month was announced. For good measure , GM “coincidentally” announced another 2,000 job cuts, just in case Congress missed the point. Much as they hate the bailout, politicians hate being blamed for job losses even more.
The market responded to this double whammy of bad news by rallying the Dow some 250 points. Go figure.
Dispatches from the subprime front are scarcely more encouraging. The top post of the week at Research Recap was Standard & Poor’s assessment that loan modification programs are unlikely to help the mortgage-backed securities markets much, and may in fact, spur more delinquencies by encouraging borrowers on the edge to default. Moody’s did take a somewhat more positive view, saying the FDIC’s program could be of some help.
Visitors also were interested in Forrester’s latest ranking of major bank websites, which gave top-rated Citibank (NYSE: C) something to take comfort in as it struggles to “redefine” itself yet again. Might we see Goldman Sachs (NYSE: GS)? Who’da thunk that the deeply private investment-bank-turned-commercial bank would be throwing its hand in with the likes of eTrade in going after the internet banking market. Is a Goldman Superbowl ad in the offing?
Technorati Tags: (c), (F), (GM), Add new tag, auto bailout, automakers, bailout, Chrysler, Citibank, Ford, Goldman-Sachs, GS, online banking, residential mortgage-backed securities, RMBS, subprime, Zeitgeist
