Troubles in subprime have begun to creep up the credit spectrum. As expected, after the bloodbath of recent subprime downgrades, the Alt-A RMBS sector took a hit last week.
Moody's Investors Service placed 66 tranches from 33 Alt-A RMBS transactions issued in 2005 and 2006 under review for a possible downgrade last Tuesday. The securities are worth approximately $318 million and are made up of both fixed- and adjustable-rate first-lien loans.
In JPMorgan Securities' monthly mortgage research conference call on Wednesday, the bank's head mortgage strategist, Matt Jozoff, said the firm expected continued pressure, particularly in the high LTV segment of the Alt-A market, as lending standards tighten.
John Sim, a mortgage strategist at JPMorgan, noted that the risk of higher enhancement levels and the potential for a downgrade on some of the poorly performing Alt-A shelves will continue to put pressure on spreads. At the same time, liquidity concerns stemming from volatility in the subprime and CDO markets have pushed out some of the funding levels for Alt-A loans, Sim said. "You combine this with a softer housing market," he concluded, "and it really is not hard to understand the pressure that should continue to come."
The bank recommended sticking to Alt-A transactions that are super senior triple-A with limited high CLTV exposure. It should be noted that Moody's actions were taken mainly on securities rated Baa' or lower. The analysts also said that, although limited documentation is seen as the most worrisome, it is the high CLTV that is a concern.
In fact, if one compares high CLTV Alt-A loans with full documentation with lower CLTV, low-documentation mortgages, the loans with lower documentation could actually perform better if one controls for LTV, Sim said. He noted that the real concern is with loans with a FICO score of less than 720, CLTV higher than 80 and limited documentation. "Deals that have a high concentration of these loans have really widened the most, and that is a thing to look out for," Sim said.
High LTV lending in the prime and Alt-A sectors is expected to start tapering off, with increased subordination levels stabilizing spreads. However, this type of lending is still at a higher level because of all the pipelines flushing out, JPMorgan noted. "The bottom line is that overall sentiment seems to be wait-and-see right now in Alt-A, and you couple that with a real lack of transparency, and it is not a good combination," Sim said.
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