Thursday, June 28, 2007

S&P, Moody's, Fitch ...Dumb, Blind Or Just A Conflict Of Interest ?

Oh boy! These Rating agencies are making it hard to give them some credibility. I´m pretty sure after all the damage is done there will be an investigation. If they don´t take action in the face of the obvious they should shut down their business. On the other hand it is too easy that investors blame the rating agencies when they havn´t done any due diligence. I don´t know what is better...That they are acting so slowly because there is a conflict of interest (bad for business) or they really believe in their models and are obviously blind to reality...... Maybe more competition will help to "update" their model.

Unfassbar. Spätestens mit diesem Debakel habe ich jeglichen Respekt vor den Ratingagenturen verloren. Ich denke das die Glaubwürdigkeit hier insgesamt nachhaltig schaden nehmen wird. Ich bin mir ziemlich sicher das wenn alles Scherben aufgekehrt sind es eine Untersuchung auch in diesem Punkt geben wird. Wenn diese angeblich so cleveren Agenturen nin einem so offensichtlichen Fall nicht erkennen können oder wollen das ihre Modelle null mit der Wirklichkeit zu tun haben dann fällt mir wirklich nichts mehr dazu ein. Ich weiß nur noch nicht was ich schlimmer finden würde....Das die notwendigen Herunterstufungen wegen eines möglichen Interessenkonfliktes (schlecht für das Geschäft) oder weil die wirklich sich stur an Ihren Modellen festhalten (selbst dann wenn rund herum die Immobilienwelt einstürzt...). Auf der anderen Seite ist echt von Investorenseite viel zu einfach die Schuld S&P und co in die Schuhe zu schieben wenn man selber offensichtlich keine genaue Prüfung vorgenommen hat. Mehr Konkurrenz würde denen sicher gut zu Gesicht stehen.....

June 29 (Bloomberg) -- Standard & Poor's, Moody's Investors Service and Fitch Ratings are masking burgeoning losses in the market for subprime mortgage bonds by failing to cut the credit ratings on about $200 billion of securities backed by home loans.

The highest default rates on home loans in a decade have reduced prices of some bonds backed by mortgages to people with poor or limited credit by more than 50 cents on the dollar and forced New York-based Bear Stearns Cos. to offer $3.2 billion to bail out a money-losing hedge fund. Almost 65 percent of the bonds in indexes that track subprime mortgage debt don't meet the ratings criteria in place when they were sold, according to data compiled by Bloomberg.

That may just be the beginning. Downgrades by S&P, Moody's and Fitch would force hundreds of investors to sell holdings, roiling the $800 billion market for securities backed by subprime mortgages and $1 trillion of collateralized debt obligations, the fastest growing part of the financial markets. ......

Loss Estimates
....Losses may rival the savings and loan crisis of the 1980s and 1990s. The Resolution Trust Corp., formed by the U.S. government to resolve the thrift crisis, sold $452 billion of assets at a cost to taxpayers of about $140 billion.

The current debacle threatens the growth of asset-backed bonds, securities that use consumer, commercial and other loans and receivables as collateral. That market, which includes mortgage securities, has doubled to about $10 trillion since 2000, according to the Securities Industry Financial Markets Association, a New York-based trade group.

Executives at New York-based S&P, Moody's and Fitch say they are waiting until foreclosure sales show that the collateral backing the bonds has declined enough to create losses before lowering ratings on some of the $6.65 trillion in outstanding mortgage-backed debt.

`Knee-Jerk Responses'
Homeowners may be delinquent on mortgage payments for at least three months before foreclosure proceedings begin, and the process can be delayed if a borrower files for bankruptcy or fights eviction. Even when lenders repossess a home, the value of the mortgage isn't written down until the house is sold. Bondholders only see a loss if the price of a house is lower than the loan used as collateral for debt securities.

``We're taking action as we see it,'' said Brian Clarkson, Moody's global head of the structured products in New York. ``We're not doing knee-jerk responses.''

Ratings companies are postponing the inevitable and are dumping securities as defaults by subprime borrowers increase, investors say.
Lehman Brothers Holdings Inc., the biggest underwriter of mortgage bonds, sold $2.43 billion of Structured Asset Investment Loan Trust bonds a year ago. An $18 million portion of the bonds rated BBB- fell to 43 cents on the dollar from 98 cents in January, according to prices compiled by New York-based Merrill Lynch & Co.

Increased Delinquencies
More than 15 percent of the mortgages in the securities are at least 60 days delinquent and another 8 percent are in foreclosure, according to the bond trustee. Moody's and S&P say they are considering downgrading the debt.
> Betracht ziehen.....

A total of 11 percent of the loan collateral for all subprime mortgage bonds had payments at least 90 days late, were in foreclosure or had the underlying property seized, according to a June 1 report by Friedman, Billings, Ramsey Group Inc., a securities firm in Arlington, Virginia. In May 2005, that amount was 5.4 percent.

``The Petri dish turns from a benign experiment in financial engineering to a destructive virus,'' Gross, who oversees the world's biggest bond fund, said this week in a commentary on the firm's Web site. The companies gave the mortgage bonds investment-grade ratings, duped by the ``six-inch hooker heels'' of collateral that can't be trusted, he said.

No Disclosure
CDOs aren't required to disclose the contents of their holdings to the U.S. Securities and Exchange Commission and most can change them after the bonds are sold.

Demand for CDOs, first used in 1987 by bankers at now- defunct Drexel Burnham Lambert Inc., is drying up as mortgage bond losses spread. Planned sales of CDOs that rely on high- rated asset-backed debt dropped to $3 billion this month from $20 billion in May, according to analysts at JPMorgan, the third-largest U.S. bank.

The ratings companies point out they have downgraded bonds less than a year after they were sold, the first time that has ever happened. S&P has lowered a total of 15 subprime bonds sold in 2005, or 0.31 percent of the total, and 32 sold in 2006, or 0.68 percent.

``People are surprised there haven't been more downgrades,'' Claire Robinson, a managing director at Moody's, said during an investor conference sponsored by the firm in New York on June 5. ``What they don't understand about the rating process is that we don't change our ratings on speculation about what's going to happen.''

A sweeping downgrade of bonds would lead to sales of assets by investors, banks and pension funds who operate under rules that would cause them to adjust their portfolios to reflect the new ratings. S&P, Moody's and Fitch have restricted their ratings changes on BBB- rated mortgage bonds to 1.3 percent of those outstanding, according to Credit Suisse analyst Rod Dubitsky in New York. About 80 percent of the remainder will eventually have their ratings reduced, he said.

Abandoned Criteria
S&P abandoned seven-year-old criteria for determining a bond's protection against default in February.

Under the old guidelines, S&P said a bond's ``credit support'' must be twice the rolling 90-day average of the sum of value of mortgages delinquent by three months or in foreclosure plus real estate that has been seized by the lender.

Credit support for a bond is determined by looking at the number of lower-rated securities that would have to go bust before it suffered losses, the dollar amount of mortgages available to pay back the interest and the annualized interest the mortgages generate in excess of what needs to be paid to bondholders.

The measure was one of four tests used by S&P, said Chris Atkins, a spokesman for the company, a unit of New York-based McGraw-Hill Cos. A failure to meet the credit support standard wouldn't have automatically resulted in a downgrade, he said.

$200 Billion
Of the 300 bonds in ABX indexes, the benchmarks for the subprime mortgage debt market, 190 fail to meet the credit support standard, according to data released in May by trustees responsible for funneling interest payments to debt investors.

Most of those, representing about $200 billion, are rated below AAA. Some contain so many defaulted loans that the credit support is outweighed by potential losses. Fifty of the 60 A rated bonds fail the criteria, as do 22 of the 60 AA rated bonds and three of the 60 AAA bonds.

All but five of 120 securities in BBB or BBB- rated portions of the mortgage-backed securities would have failed S&P's criteria,
according to data compiled by Bloomberg.

None have been downgraded, though S&P and Moody's have parts of three pools of securities linked to the index under review for a downgrade. Fitch has downgraded parts of three mortgage pools tied to the ABX and put four on watch for downgrade.

``That's like saying these trees are just fine as there's a forest fire on the other side of the hill,''
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Blogger jmf said...

Countrywide Subprime Second-Lien ABS Downgraded

11:42 PM  
Blogger David said...

>>S&P abandoned seven-year-old criteria for determining a bond's protection against default in February.

Under the old guidelines, S&P said a bond's ``credit support'' must be twice the rolling 90-day average of the sum of value of mortgages delinquent by three months or in foreclosure plus real estate that has been seized by the lender.<<

Credit support for what ratings level? To remain investment grade? This is not clear.

All that said, the ratings agencies are in major damage control mode now. Woe to them who trusted them on novel ABS classes, like subprime.

David Merkel

8:11 AM  
Blogger CA Real Estate Blogger said...

So where do you find foreclosure properties for investment? I just did an interesting analysis of where the foreclosure properties are among different cities in California. The results are surprising - that some places have up to 40% of the homes on the market being foreclosure-related! The article:

- SF Real Estate Blogger

11:58 AM  
Blogger jmf said...

Moin David,

"All that said, the ratings agencies are in major damage control mode now. Woe to them who trusted them on novel ABS classes, like subprime."

I think you nailed it.

6:39 AM  

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