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Thursday, May 29, 2008 2:49 PM

Bring On The Alt-A Downgrades

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HousingWire is reporting S&P Lowers the Boom on 1,326 Alt-A RMBS Classes.

Bring on the Alt-A downgrades: Standard & Poor’s Rating Services said Wednesday evening that it had slashed the ratings of 1,326 Alt-A residential mortgage-backed securities, after recent data is proving performance of Alt-A loans originated in 2006 and 2007 to be particularly problematic. The downgrades affect $33.95 billion in issuance value and affect Alt-A loan pools securitized in the first half of 2007 — roughly 14 percent of S&P’s entire Alt-A universe in that timeframe.

Perhaps more telling were an additional 567 other Alt-A classes put on negative credit watch by the ratings agency.

A review of affected securities by Housing Wire found that all of the classes put on watch for a pending downgrade are currently rated AAA, suggesting that S&P’s confidence in thin overcollateralization typical of most Alt-A deals is quickly waning. The total dollar of potential downgrades to the AAA classes in question would dwarf Wednesday’s downgrades, which affected only mezzanine and equity tranches.
Happy Birthday WMALT 2007-0C1

I have been tracking a particular Washington Mutual (WM) Alt-A mortgage pool for 5 months. The pool is known as WMALT 2007-OC1 A1. It is a securitized mortgage-backed security issued in May, 2007. It is also the poster child for what's wrong with Alt-A.

In Evidence of "Walking Away" In WaMu Mortgage Pool, I wrote about data January.
The February update was WaMu Alt-A Pool Revisited.
The March update was called WaMu Alt-A Pool Deteriorates Further.
The April update was WaMu's Suspect Mortgage Pool.

The pool is now one year old. Happy Birthday. Let's see how the pool is doing as we light one candle on the cake to celebrate.

WMALT 2007-0C1 May Picture

click on chart for sharper image

Facts and Figures
  • The original pool size was $513,969,100.
  • 92.6% of this cesspool was rated AAA.
  • 22.89% of the whole pool is in foreclosure or REO status after 1 year.
  • 31.17% of the pool is 60 days delinquent or worse
Chris Puplava at Financial Sense put together some additional charts to consider.

REOs vs. 60 Day Delinquencies or Worse

click on chart for sharper image

REOs (green) are the right scale, and 60 day delinquencies (red) are the left scale.
As expected REOs are following 60 day delinquencies with a lag. Over time well over 30% of this pool is going to fail.

Pool Balance vs. Foreclosures

click on chart for sharper image

Foreclosures (green) are the right scale, and pool balance (red) is the left scale. No matter how you look at this data things are deteriorating rapidly.

I do not know about this pool in particular, but in general the ratings agencies are well behind the curve with downgrades. The S&P just now appears to be figuring out what some of us have known for a long time:

1) Pools from 2006-2007 are extremely suspect in quality
2) Confidence in Alt-A pools is unwarranted

S&P is still far behind the curve given those 1326 Alt-A downgrades have only hit the mezzanine and equity tranches, not the senior tranches. Many downgrades of those senior tranches are coming. The losses are going to be staggering.

Mike "Mish" Shedlock
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