Taking Stock of Bonds

January 8, 2008

The Hits Keep Coming

Moody's on Tuesday downgraded transactions issued by two Wall Street dealer firms -- Bear Stearns and Deutsche Bank -- that were backed by Alt-A mortgage loans. In both cases the deals were issued in 2007 and involved a total of 14 different transactions.

In the case of Bear, eight bond deals were impacted and most of the collateral was first lien, fixed and adjustable rate Alt-A paper that is purportedly of better quality than subprime debt.

"The ratings were downgraded and placed under review for downgrade based on higher than anticipated rates of delinquency, foreclosure, and REO in the underlying collateral relative to credit enhancement levels," Moody's explained in statements accompanying both sets of downgrades. 

Six deals from Deutsche Bank involved the downgrade of 62 tranches of debt and the possible downgrade of ratings for 16 tranches. The reasoning for the downgrade of the Deutsche Bank issues was more of the same. Higher than anticipated delinquency and foreclosure rates.

What is amazing about this is that Alt-A paper was supposed to have been made to better or more credit-worthy borrowers. Then there is the fact that the late payments and defaults are expected on not just adjustable rate mortgages, but fixed-rate paper.

These downgrades are just another reminder that the current housing crisis is not just a subprime problem relegated to loans that are seeing an increase in monthly payments. It is an issue that has clearly impacted a broad range of borrowers who opted for both fixed-rated and floating-rate mortgage loans. This is something regulators and Washington legislators ought to consider when crafting any other plan to buttress the housing market.

What is also probably unnerving to many investors is that the deals were brought to market in 2007. So, it did not take long for the loans backing the bonds to start rotting.