New Writedown Risk: Alt-A

The bloggers over at Calculated Risk have reported on a story making the rounds in the Internet. This story involves S&P’s downgrade of Alt-A Residential Mortgage Backed Securities (RMBSs). The crux of the matter is that S&P misjudged how much collateral in the underlying value of the homes there was to protect these securities from significant downgrades. The 2006 and 2007 years of Alt-A (one notch above subprime) borrowers’ loans are turning out much worse than S&P anticipated.

Calculated Risk reference HousingWire, a housing news site, as a source. HousingWire has this to say about the downgrades:

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.
HousingWire, 28 May 2008

Now, in case you don’t know what this means, I’ll spell it out. Alt-A loans made in 2006 and 2007 are nearly as risky as their subprime brethren. There will be significant defaults and the RMBSs tied to these loans will suffer huge losses. Those bonds will lead to another wave of writedowns at financial institutions.

Financial institutions have accounted for losses on subprime loans but have not written down Alt-A loans. Nor have they addressed impending commercial real estate, construction loan, credit card and auto loan credit deterioration. Writedowns and loan losses will be much heavier than anticipated.

See also: Credit Crisis Timeline for a full list of writedowns and capital raising by institution and a timeline of the credit crunch.

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