S&P's Vacillating Lies Beginning to Surface, Massive Loses in Mortgage-Backed Securities
May 4, 2007 (EIRNS)--Reuters has reported that beginning in the last week of April, the major credit ratings agencies such as Standard and Poor's and Moody's have had to start downgrading mortgage-backed securities (MBS)--a crack in the ratings wall which has been holding back real losses in MBS that could rise to hundreds of billions in the U.S. housing bubble collapse.
So far, only $1 billion in bonds issued in 2006 have been downgraded by the reluctant raters, who have been standing between MBS holders and the need to report large losses known to have broken out in the MBS markets. That's $1 billion out of $36 billion in the worst kind of subprime-based securities, "second lien" mortgages; and out of $483 billion of MBS created last year alone. Moody's has cut 30 issues of MBS from 2006 from investment grade to junk, and is reviewing 81 more; S&P has downgraded 43 issues to junk and is reviewing 60 more.
"It's unusual to see downgrades in subprime deals so soon after they were issued," said a Credit Suisse analyst quoted in the May 4 Wall Street Journal. "This is not a normal phenomenon and is a cause of concern." An executive from a New York hedge fund is also quoted, "It's embarrassing for a ratings company to downgrade bonds so quickly" after the bonds were issued. "It reflects poorly on all parties in the underwriting process and their judgment of the credit-worthiness of the bonds."
The ratings companies are still claiming that 90% of the MBS based on subprime mortgages won't require downgrade--indicating how far the process has yet to go. Even the most conservative investment bank estimates put the MBS losses at over $20 billion already. GM's finance arm has lost nearly $2 billion over six months; UBS bank in Switzerland just had to close down its hedge fund due to heavy MBS losses.
An S&P report on the U.S. residential real estate sector, sent to subscribers on April 30, says that "the sector is now about one and a half years into what ... may be a roughly three-year downturn," according to Reuters May 4. This means, for example, that S&P expects to downgrade more than a third of all U.S. homebuilding companies, essentially all of those which have gone heavily into building homes purchased by subprime mortgages. As for the others, the "prime builders," the largest five all reported losses in the first quarter, and S&P warned on April 24 that these builders' negative cash flow created the potential that their lenders may "foreclose," calling in their credit.