Thread: S&P: Credit Crisis Halfway Over at Best

S&P: Credit Crisis Halfway Over at Best

Wednesday, August 13, 2008 2:26 PM

NEW YORK -- A year-long credit crisis may be only halfway over and defaults of prime mortgages and problems at U.S. bond insurers are expected to exert a drag on future bank earnings, Standard & Poor's said Wednesday.

Defaults and late payments for mortgages known as Alt-A securities and prime mortgages are rising, and problems at bond insurers — known as monolines because they traditionally provided services to only one industry — may hit bank earnings in subsequent quarters, S&P credit analyst Tanya Azarchs said.

As the value of mortgage securities continues to fall, bond insurers' exposure to the bonds may cause a ripple effect that forces more Wall Street banks to incur losses on the insured securities.

"We believe there could be further monoline write-downs that banks will have to take," Azarchs said on a conference call. "We're expecting more fairly significant problems to come."

The bond insurers became entangled in the credit crisis when they grew beyond insuring municipal bonds and expanded into complex structured bonds.

Financial institutions such as JPMorgan Chase & Co have now suffered more than $400 billion in paper and realized losses due to the meltdown in U.S. mortgage securities.

The International Monetary Fund estimates the figure may grow to $1 trillion, while New York University economist Nouriel Roubini estimates the figure may even reach $2 trillion.

Earlier this week, JPMorgan reported $1.5 billion of losses so far this quarter on mortgage-linked assets.


Azarchs said the market is roughly halfway through a year-long crisis, "at best," she said. "Obviously, these are very unprecedented times."

PRIME LOAN DELINQUENCIES RISE

Azarchs noted that even prime loans are deteriorating at a rapid clip this year.

"This is only escalating and it's not getting any better," she said.

Delinquencies of prime mortgages originated in 2007 are outpacing those made in 2006, according to Federal Deposit Insurance Corp data sent to Reuters in an e-mail.

Some 0.91 percent of prime mortgages from 2007 were seriously delinquent after 12 months, meaning they were in foreclosure or at least 90 days past due. That figure is nearly triple the levels seen in 2006, when 0.33 percent of prime mortgages were delinquent after 12 months, the FDIC data showed.

Analyst Scott Sprinzen also said write-downs from collateralized debt obligations, or CDOs, are becoming less of a threat, but a greater concern may come from bond insurers and Alt-A securities, he said.

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Lehman: $469B in Mortgage Bonds in Danger

Monday, August 25, 2008 5:25 PM

NEW YORK -- Money managers may be forced to unload up to $469 billion in residential mortgage-backed securities that were pitched as some of the safest investments, according to one of Wall Street's largest bond firms.

Potential downgrades of the bonds, which represent about 30 percent of outstanding "AAA" securities backed by U.S. mortgages, would force a sale, Lehman Brothers said in a report dated Monday.

The Lehman study comes amid heightened worry that eroding credit in mortgages, especially so-called "Alt-A" loans that required less proof of income or assets, will cause losses to even the safest portions of the bonds. Standard & Poor's is reviewing ratings on mortgage bonds after revising its loss projections higher in July.

Lehman Brothers Holdings Inc itself had about $15 billion of "RMBS" on its balance sheet as of the end of May. It also had another $10 billion of home loans, servicing and related assets.

"Valuations in the residential credit sector continue to languish as concerns about forced asset sales from banks, broker/dealers, and structured vehicles dominate," Lehman analysts Rahul Sabarwal and Madhuri Iyer said in the report. Rating downgrades are imminent, they added.

Rates of increase in delinquency for many Alt-A and prime jumbo U.S. mortgages in July outpaced those on the subprime loans that helped spark the housing crisis, S&P reports showed on Friday.

The erosion may open a new chapter of the credit crisis by hurting a more conservative class of investors that avoided more complex mortgage products -- like collateralized debt obligations -- that have caused the worst of the write-downs for banks around the world since 2007.

Many of the securities are products of Wall Street mortgage fundings during the housing boom that took market share from Fannie Mae and Freddie Mac "agency" programs and were used to finance risky loans. But most of each bond was still rated "AAA" since junior investors agreed to shoulder greater risks.

Downgrades to "AAA" bonds could be especially harsh for mutual fund money managers who are prohibited from holding securities rated below the top tier, the analysts said.

Those money managers may sell $64 billion of their $225 billion in "AAA" non-agency mortgage bond holdings as downgrades occur, they said.

Other holders, including the Wall Street dealers, insurance companies and banks, have more flexibility in dealing with the downgrades and are less apt to sell, they said. Coping with higher capital requirements and funding costs that would follow downgrades is probably preferable to the severe loss that would be realized on a sale of the bonds, they said.

But downgrades would likely add to mark-to-market losses for banks if other investors liquidate assets, they said.

After a year of mortgage market turmoil, "AAA" rated non-agency bonds are trading at 40 percent discount to their par value, they said. Lower-rated bonds already heavily tagged by downgrades are valued even lower, an investor said.

Commercial banks have about $110 billion of their $380 billion in "AAA" non-agency bonds at risk, Lehman calculated. Non-U.S. investors hold $413 billion in the debt, and $118 billion is "at risk," they found.

Fannie Mae and Freddie Mac, the largest providers of funding for U.S. mortgages, hold non-agency MBS but downgrades do not affect requirements on their capital.

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Buffett: Game is Over For Freddie and Fannie

Friday, August 22, 2008 10:15 AM

"The game is over" for Freddie Mac and Fannie Mae as independent companies, says billionaire investor Warren Buffett.

"They were able to borrow without any of the normal restraints. They had a blank check from the federal government," the chairman of Berkshire Hathaway told CNBC.

Buffett predicts that, "You'll see some action fairly soon" to support the companies.

Fannie and Freddie shares have plummeted amid speculation about a government bailout of the government-sponsored enterprises (GSEs) which together own or guarantee almost half of the $12 trillion U.S. mortgage market.

Shares of both mortgage companies have dropped more than 90 percent in the past year. The companies touched 20-year lows yesterday on the New York Stock Exchange.

The two mortgage companies recorded almost $15 billion in combined net losses in the past four quarters as delinquencies rose to record levels.

Last month, U.S. Treasury Secretary Henry Paulson won congressional approval to pump emergency capital into Fannie and Freddie.

Paulson, former Federal Reserve Chairman Alan Greenspan, and Richmond Federal Reserve Bank President Jeffrey Lacker have called for the companies to be nationalized.

"They're too big to fail," says Buffett.

"That doesn't mean that the equity can't get wiped out, and it almost has. In a practical sense, as institutions, they don't have any net worth … People who own their insured mortgages or own their debt, nothing is going to happen to them. The equity and preferred stock is another question."

Buffett had an 8.5 percent stake in Freddie Mac until he became "uncomfortable" with the risks Freddie was taking on.

In 2005, he said "it would not be the end of the world" if Fannie and Freddie stopped buying new mortgages.

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