Huge Downgrades Will Mean More Write Downs For Banks


Standard & Poors just delivered devastating news on the state of thousands of mortgage backed securities, issuing rating cuts on everything from AAA-rated stuff to the dodgier Alt-A and subprime tranches.

Paul Jackson at Housing Wire dug through the latest releases from S&P to detail the blood shed.

  • Triple A Rated MBS Not Immune.  We constantly hear from banks that a huge part of their remaining MBS portfolio is comprised of “highly rated” securities, and the implication is that these should somehow be immune to the disaster that is the US mortgage market. Banks refuse to write-down these securities, and won’t sell them at a discount, claiming pricing is irrational and reflects market “dislocation.” Well, S&P just downgraded whole swaths of AAA resdiential morgage backed securities, including a whole bunch put together by Wachovia. This will be especially painful for banks and other investors, who will now have to admit that the value of these things really is lower than they though.
  • Alt-A Get Crushed. Over one thousand classes of mortgage securites from various issuers got lowered to ‘D.’ Ratings on 2,111 products from 143 of the affected transactions were placed on CreditWatch with negative implications.
  • Subprime Puke Fest. 737 classes of mortgage pass-through certificates from 516 U.S. subprime issuances to got lowered to ‘D’ rating. 
  • Jumbo Hit Too. 117 classes from 94 different prime jumbo deals were cut.
  • Already Worthless Second Mortgages Now Worth Even Less. 89 classes from 68 U.S.  second-mortgage deals were cut.

These cuts on mortgage backed securities, many of which were very highly rated at one point or another, mean that there’s a lot more pain left for the balance sheets on banks. Banks continue to hold many of even the worst kind of securities at ridiculous marks. For instance, the other day the New York Times reported on an unnamed bank carrying MBS built out of second-mortgage, no-money down mortgage at 97 cents on the dollar. That kind of fanatical resistance to the signals of the market will be hard to keep up as the new wave of downgrades hits the shores.