S&P Cuts 184 Prime Jumbo RMBS Classes; Warns AAA Downgrades Ahead

Standard & Poor’s Rating Services said late Thursday that it cut ratings on 184 classes of U.S. residential mortgage-backed securities from 52 transactions backed by prime jumbo loan collateral. All affected deals were from the 2006 vintage, and none of the cuts reached up to the AAA level. At least not yet. S&P also put 110 ratings of mostly AAA-rated prime jumbo RMBS classes on negative ratings watch, after announcing the downgrades. The warnings represent the first signal from any major rating agency that prime jumbo mortgages — usually pretty vanilla mortgages given to prime borrowers, for purchases that exceed the traditional conforming loan limit of $417,000 — may be running into greater problems than originally expected. Thursday’s cuts totaled an issuance amount of nearly $3.5 billion, S&P said — a fraction of the prime jumbo market, to be sure, even within the 2006 vintage. But an unnerving trend, nonetheless. Housing Wire reported on what appeared to be emerging problems in prime jumbos a few weeks ago, when reviewing S&P’s latest remittance summaries. Total delinquencies for prime jumbos originated in 2006 rose 15.4 percent during March, while the 2007 vintage saw DQs ratchet upward by 15.5 percent — keep in mind, that’s on a monthly comparison basis, to boot. Serious delinquencies rose even higher, jumping 22.6 percent for the 2006 vintage and 18.8 percent for the 2007s. So far, S&P has limited its downgrades for prime jumbos to the 2006 vintage, and noted Thursday that serious delinquencies for prime jumbo RMBS deals in that year have risen more than 68 percent since December of last year. The agency said that it had based its current round of downgrades on benchmarks from 1999 — but also said that it expects losses “in 2006 to significantly exceed those experienced in 1999.” Considering that 2006 is likely to be worse than 1999 — and that 2007 is already performing worse than 2006 — it’s not too much of a stretch to consider that further downgrades are more than likely already in the offing within the prime jumbo sector. And with downgrades to Alt-A hitting a full and stunning stride in the past few weeks, news of fresh downgrades to prime jumbos is not the sort of thing investors likely want to be seeing right now.