Tuesday, July 10, 2007

S&P Finally Says Subprime is Mostly Junk

This is just too huge not to post:
WASHINGTON (MarketWatch) -- Standard & Poor's just drove a huge harpoon into the heart of the mortgage credit bubble, and it's going to take a long time to clean up the mess once the beast finally dies.

S&P, one of the three main credit-rating agencies that served as enablers of the subprime-mortgage boom, announced Tuesday that it would lower its ratings on 612 bonds, a small portion of the mortgage-backed securities it had given its seal of approval to. See full story.

But the bigger news is that S&P isn't going along with the charade anymore. S&P said it would change its methodology for rating hundreds of billions of dollars in residential-mortgage-backed securities. And it would review its ratings on hundreds of billions of dollars in the more complex collateralized debt obligations based on those subprime loans.

A lot of debt will be downgraded to junk status. A lot of that debt will have to be sold at fire-sale prices. A lot of pension funds and hedge funds that once thrived on the high returns they could get from investing in subprime junk will now lose a lot of money.

S&P's announcement is a death warrant for the subprime industry. No longer will mortgage brokers be able to help buyers lie their way into a home. Fewer stressed homeowners will be able to refinance their mortgage, thus extending and exacerbating the housing bust.

"We do not foresee the poor performance abating," S&P said.

Prices will fall, and foreclosures will rise. More mortgage fraud will be uncovered as the tide goes out.

And hedge funds will have to find another way to beat the market -- if they survive this blow, that is.


Blogger Lisa said...

Wow. Is this the watershed event we've been waiting for? If Subprime loans go by the wayside, and AltA really tightens up, we'll be back to traditional lending standards applied to Prime borrowers. Foreclosures will go through the roof, as FB's will not be able to sell their homes without the "benefit" of voodoo financing and an easy supply of GF's.

And here in Marin, the Marin Heat Index finally dipped below 0.60.

Jul 10, 2007, 8:03:00 PM  
Blogger Lisa said...

P.S. Marinite, I was so glad to see a new post!!!

Jul 10, 2007, 8:14:00 PM  
Blogger Marinite said...

I'm more interested in what interest rates will be doing.

Jul 10, 2007, 9:15:00 PM  
Blogger W.C. Varones said...

It's all over... for the unknown realtor.

Jul 10, 2007, 9:28:00 PM  
Blogger see me said...


Jul 10, 2007, 10:17:00 PM  
Blogger marinite2 said...

Just saw this over at Ben's blog:

“Wall Street is bracing for a nearly $2 trillion washout over the collapse of hollow and shaky mortgage bonds, triggering fears of a recession worse than the dot-com bubble bursting.”


Jul 11, 2007, 10:42:00 AM  
Blogger Westside Bubble said...

Missed you.

Jul 11, 2007, 9:13:00 PM  
Blogger Ace Hunter said...

Welcome back, Marinite.

I was starting to think you were [Betty] Pagett, and your previous post was a clever way of you telling us that YOU were retiring.


Jul 13, 2007, 9:08:00 AM  
Blogger marinite2 said...

I was starting to think you were [Betty] Pagett

That's funny.

No, I don't even know her (not personally anyway).

Jul 13, 2007, 9:49:00 AM  
Blogger Logan Chierotti said...

good read, thank you!

Do you have an opinion in what interest rates will do?

Im happy to see them tightening up, at the same time it has really put a hurt on my business in an already slow market!

Logan Chierotti

Jul 13, 2007, 4:38:00 PM  
Blogger buyer2be said...

Interesting, however for perspective - I have read on a finance editorial that sub-prime accounts for about 10% of the whole mortage environment, and if 50% of all of those (high estimate) tanked, then the total effect would be 5% of total mortgages. Although 3 years saw a run of these mortgages, terribly underwritten by the way, they are a very very small minority of outstanding mortgages.

Jul 18, 2007, 2:55:00 AM  

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