SPECIAL UPDATE - Moody's Puts a Fork In What's Left

Posted 2007-07-31 23:54
by Karl Denninger

The non-agency mortgage business was killed this evening.

Most ALT-A paper is now essentially being rated as "subprime", with huge increases in overcollateralization and such required.

""Actual performance of weaker Alt-A loans has in many cases been comparable to stronger subprime performance, signaling that underwriting standards were likely closer to subprime guidelines," said Marjan Riggi, Moody's senior credit officer, "Absent strong compensating factors, we will model these loans as subprime loans.""

The short answer to "what will this do" is that it is going to destroy most of what is left of the CDO mortgage marketplace by forcing spreads high enough that you'll think you took out a credit card loan to fund your mortgage.

Effectively, the market has spoken.

More on this when I get details; the short version, however, is that what I had predicted - roughly 30% of all mortgage activity in the US, based on 2006/early 07 levels - has just been shut down.

Nobody writing other-than-agency paper will be untouched by this. Even presumed "reasonably safe" big lenders such as Countrywide are going to get severely roached, and the ALT-A "boutique" lenders will simply be taken out and shot.

The futures are roaching hard as I write this. Tomorrow's open is likely to be very interesting, and not in a way that, if you left long positions on going into the close, you will find amusing.

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