Thursday, May 29, 2008

Alt-A downgrade deluge

(FT Alphaville) Alt-A meltdown? It’s been a while since we’ve seen these kind of mass downgrades, and it’s not even a Friday!

NEW YORK (Standard & Poor’s) May 28, 2008–Standard & Poor’s Ratings Services today lowered its ratings on 1,326 classes of U.S. residential mortgage-backed securities (RMBS) certificates issued in the first half of 2007 backed by Alternative-A (Alt-A) mortgage collateral. We also removed our ratings on 722 Alt-A classes from CreditWatch. In addition, we placed our ratings on 567 other Alt-A classes on CreditWatch with negative implications. Finally, we affirmed our ratings on 293 Alt-A classes and removed them from CreditWatch negative. All of the ratings that are being removed from CreditWatch were placed there on Feb. 29, 2008. This action resolves all of the CreditWatch actions taken that day.

1,326 tranches downgraded may sound like a lot, but as S&P goes on to state, the figure only represents around $34bn. While superficially reassuring, that number should nevertheless set alarm bells ringing. It means the average tranche size is of these downgraded deals is pretty small, which in turn means we’re talking about mezz and subordinate tranches.

S&P also alerts clients to a further 567 tranches being put on negative watch. From Housing wire:

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 dollar-size of those triple A tranches should quite easily surpass that of the subordinated notes just downgraded. If anything, this latest slew of downgrades should be taken as a pretty clear lead indicator for looming triple-A downgrades of Alt-A.

A week ago UBS looked like it was being very conservative in selling its Alt-A for 68 cents on the dollar. Now it’s looking like it called the market at just the right moment.

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