Thursday, February 26, 2009

Moody's To Downgrade $680 Billion Of RMBS

After the prompt futures' rebound following the earlier horrific durables and initial jobless claims, we are 99% convinced the market is set on ignoring any pig that isn't smothered in lipstick (the technical argument goes pigs with lipstick are priced in), so the following piece of news will definitely not have any impact on the whole bunch of "leap of faith" focused investors cum Indiana Jones and The Last Crusade fans (best of the four by far).

But anyway, Moody's announced earlier that it is not only going to dwongrade $680 billion of subprime RMBS, totaling 7,942 tranches of 2005-2007 vintages, but it will increase the loss assumptions by 50%! from 22% previously to 32% currently. For those who actually care about stuff, this is a big deal as it takes out another major component of the lower rated RMBS tranches, but more importantly, it demonstrates the vengeance with which Moody's will try to overcorrect its blunder in CMBS realm as well.

What is shocking is that Moody's, in the blurb below, demonstrates a better grasp of the economic situation than the Obama administration:

Currently 42% of outstanding 2006-vintage subprime loans are at least 60 days delinquent, in foreclosure or held for sale. Moody's believes that, without intervention, nearly all of the already-delinquent loans will eventually default. This assessment is based on very high current observed roll rates to foreclosure combined with increasing unemployment and decreasing property values. By year end, one-third of borrowers who are currently paying on their mortgages will become delinquent and eventually default (19% of today's outstanding loans). Furthermore, Moody's projects that an additional 22% of today's non-delinquent loans would default after 2009 (13% of outstanding loans). This would imply the overall subprime default rate would rise to 72%.

The anticipated actions will vary by vintage, but based on our anticipated average loss projections, it is likely that the vast majority of mezzanine and subordinate certificates currently rated B or above would be downgraded to ratings of Caa or below, particularly for bonds issued in 2006 and 2007.

Full report below

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