I came across this story tonight that I thought was shocking. I have listed some high lights but take the time to ready the whole article.
``This asset class has taken a bullet in the head,'' said Christopher Whalen, an analyst for Institutional Risk Analytics
Losses from seriously delinquent loans will be 40 percent to 50 percent, up from a traditional level of about 35 percent
If in fact U.S. home foreclosures doubled to 223,538 in September from a year earlier than means that the banks now have in inventory of at least 223,538 home to be sold as quickly as possible. This inventory has to be moved by the banks and they will drive the prices down to get this inventory off their books. The result will be more pressure on selling prices.
Oct. 11 (Bloomberg) -- Moody's Investors Service lowered ratings on $33.4 billion of securities backed by subprime mortgages, the biggest downgrade yet, saying losses on delinquent home loans will continue to rise.
The 2,187 securities were issued in 2006 and represent 7.8 percent of the original dollar volume of the debt rated by Moody's, according to a statement today by the New York-based credit ratings company. Moody's affirmed ratings on about $280 billion of securities.
Moody's, a unit of Moody's Corp., cut the securities after increasing its assumptions for losses on delinquent home loans and tightening its ratings criteria. The reductions, the most sweeping among the three top ratings companies, follow similar moves by Fitch Ratings, which last week lowered rankings on $18.4 billion of subprime bonds.
``This asset class has taken a bullet in the head,'' said Christopher Whalen, an analyst for Institutional Risk Analytics, a research firm in Hawthorne, California. ``The unfortunates who have this will not want to hold the paper any more. These bonds are going to trade like orphans.''
Moody's, Standard & Poor's and Fitch, a unit of Paris-based Fimalac SA, were criticized by investors and lawmakers for awarding excessively high ratings to subprime securities and failing to predict that lax lending standards may increase the change of home-loan delinquencies. Subprime mortgage defaults reached record highs this year and some securities have dropped by more than 50 cents on the dollar.
The downgrades came the same day that RealtyTrace Inc. said U.S. home foreclosures doubled to 223,538 in September from a year earlier as subprime borrowers struggled to make payments on adjustable-rate mortgages. Mortgage servicers are also unlikely to modify loans to help borrowers avoid default, Moody's said, citing a recent survey.
One percent of U.S. subprime mortgages with interest rates that began to adjust in January, April and July were modified to help homeowners avoid default, Moody's said.
The company now expects losses from seriously delinquent loans will be 40 percent to 50 percent, up from a traditional level of about 35 percent.
``It is very challenging to come up with an assumption for losses because we don't have many yet,'' said Nicolas Weill, Moody's chief credit officer for structured finance. ``To come up with an assumption we talked to a lot of servicers and we do have some losses coming in. We know that some areas will have more than 40 percent and others will have less.''
Moody's affirmed securities rated Aaa and Aa. They represent about 75 percent of Aaa bonds rated by Moody's and 52 percent of those rated Aa.
About $23.8 billion of securities were placed on review for a cut, including 48 classes rated Aaa, Weill said. Most of the securities downgraded were originally rated Ba, Baa, or A, Moody's said.
About 755 bonds were lowered to Caa1 or below, a designation that means bonds are of ``poor standing,'' or there may be ``elements of danger with respect to principal or interest.''
``The lower ratings are being affected more and deeper, which is appropriate,'' Weill said. ``The higher ratings are being affected less.''
Moody's said last month it expects to lower ratings on more subprime-mortgage securities, and will assume its rankings for many such bonds issued since July 2005 are too high in assessing new collateralized debt obligations. CDOs package pools of mortgage securities and slice them into pieces with varying degrees of risk, from AAA to unrated portions.
``Now a CDO manager will have to run the value model and revise it in light of the new evaluation,'' said Joseph R. Mason, associate finance professor at Drexel University in Philadelphia. ``The rating agencies are going to have to do the same thing. Now, they're going to have to go back and rerate the CDO and we have not yet seen those results.''
The downgrades of the 1,003 bond classes represented 11 percent of the entire $173 billion of securities from 2006 that were rated by Fitch.