Posted by Karl Denninger
One of my favorite movies of all time…
I have often commented that we’re nowhere near done with the mortgage explosions, and that where subprime was bad, those loans made in 2005-2007 to people who lied about their incomes – which is 90% of those who took out “ALT-A” loans – were going to be a catastrophe.
Well, as Kirk said, “here it comes”
Moody’s Investors Service put $572.7 billion in Alternative-A residential mortgage-backed securities issued from 2005 through 2007 on watch for possible downgrade after it revised its loss provisions.
The rating agency said Alt-A loans that are 60 or more days delinquent “have increased markedly” since it last revised its loss projections. Alt-A mortgages, which sit between prime and subprime, typically were granted without the borrower showing proof of income or assets.
That’s a cool half-a-trillion worth.
And guess what this means for loss rates?
Moody’s said it now projects, on average, cumulative losses of 14% of the original balance for 2005 securitizations, 29% for 2006 securitizations and 35% for 2007 securitizations. The updated loss projections will have the greatest impact on senior securities issued in 2005, the firm said.
That ought to leave a mark.
No, the banks have not taken write-downs of some 27-30%ish on these securities in aggregate (that’s another $150-170 billion worth), nor has anyone else.
One wonders when our government will recognize that a loan made to someone who claims to have $200,000 in income but really makes $50,000 simply cannot be refinanced into anything the borrower can afford nor is there any way to prevent that loan from defaulting. This is the ultimate fraud and outrage in “extend and pretend” and “mark to fantasy” – there is no possible way for these loans to be “made good” no matter what happens in the future – they were always going to blow up unless house prices continued to rise forever, thereby allowing the “borrower” to roll them over time and time again.
Those who believe we can “make it all ok” are delusional beyond words.