Slashdot

First, to all my 3-D friends who poo-poo'd the idea that real estate never looses value - "I told you so ..."

Assumptions on severity (how big losses will be when a property goes into foreclosure) have been ratcheted up to 40% from 33%, reflecting the current experience of businesses that service such loans, S&P said.

Okay , now that THAT's taken care of ...

This makes it official

S&P finally says subprime is mostly junk
Commentary: New methodology is death knell for the troubled industry
By MarketWatch
Last Update: 12:51 PM ET Jul 10, 2007

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.

1 in 3 homes was refinanced in the last 3 years with a "junk mortgage"; people cashing in their "eqity" for an average of almost $40,000.00 each, and people getting "liar loans", ARMs (Adjustable-Rate Mortgages), zero-percent-down, etc.

With interest rates set to rise, and prices falling, more than a trillion dollars of mortgage debt will be "reset" this year - and much of that will be "under the water" - people owing more on their homes than they are worth. A period of stagflation is pretty much inevitable by the winter; there is also a heightened risk of a recession - or worse.

BTW: Moodies also got into the downgrades act.

More from S&P:

S&P said it was taking action because losses on the mortgages underlying these securities have risen more than expected and now exceed anything that happened before.

Losses will probably increase as the U.S. housing market especially parts financed with subprime loans continues to decline before it improves, S&P said. Property values will decline 8% on average between 2006 and 2008 and that will exacerbate losses on subprime RMBS, the agency explained.

My guess is they're hoping for "only" an 8% loss ... saying they could go down by 40% between now and 2011 would cause a stampede effect ... but that's one number that is being given serious consideration. Its also the number that S&P is looking at as "reasonable" for losses on foreclosed properties. Considering that some properties in Japan lost 99% of their value in their melt-down, and have yet to recover, anything is possible. I'd be surprised if losses over the next 4 years are less than 20% - 25%.