Interest Rate Roundup

Wednesday, February 13, 2008

S&P cuts mortgage insurer outlooks; Fitch survey finds credit pessimism widespread

Some news out of S&P this evening ...

"Standard & Poor's Ratings Services said today that it took rating actions--mostly unfavorable--on several U.S. mortgage insurers and their core and dependent foreign subsidiaries ...

"These changes resulted from a reassessment of our expectations for the sector," explained Standard & Poor's credit analyst James Brender. Deterioration in the housing markets and performance of all types of mortgages (prime, Alt-A, and subprime) has caused Standard & Poor's to revise its expectations for all U.S. mortgage insurers' loss costs from mortgages originated in 2005, 2006, and 2007. We also have concerns that the 2008 vintage could be unprofitable because of falling home prices and a high percentage of new insurance written from mortgages with loan-to-value (LTV) ratios of more than 95%. Mortgage insurers have announced pricing and underwriting initiatives to address this issue, but Standard & Poor's believes it is still something that should be closely monitored."

The actions vary from insurer to insurer, with most firms either placed on CreditWatch with negative implications or suffering an outlook downgrade to negative from stable.

Meanwhile, a Fitch Ratings survey of institutional investors found some interesting things -- namely that money managers are fairly pessimistic about the outlook for the credit markets in 2008. Here's a summary and some excerpts:

"Stability in the U.S. credit markets is not expected to return until third quarter-2008 or later, while stability in the housing market is likely even further off, according to the latest Fitch Ratings/Fixed Income Forum Survey of institutional investors. This survey is conducted by Fitch semi-annually in partnership with the Fixed Income Forum and received responses from 88 institutional investors.

"Viewed as most critical to restoring stability to the credit markets was 'confidence in financial disclosure of mark-to-market losses.' 'Investors are clearly concerned about financial firms exposure to the current downdraft in securities prices, and want clarity as to the market losses experienced to date,' said Managing Director James Batterman. Also viewed as important were 'home price stabilization' and 'further fed easing', while 'government driven remedies' were viewed as potentially harmful or simply not important.

"A weakening economy is viewed as the greatest risk to the credit markets among U.S. institutional investors. Other risk factors include 'housing market disruptions', failure of a financial institution or hedge fund, and geopolitical risk. The results are a significant reversal of investor sentiment since Fitch's June 2007 survey when shareholder-friendly activities were cited as the biggest threat, and the broader economy was not generally considered to be a large risk factor.

"Respondents were nearly unanimous (99%) in their belief that the risk of a U.S. recession is either moderate or high, while fully 100% of respondents expect the default rate to increase at least moderately in 2008, with about half of these expecting the rate to move significantly higher. This is an abrupt change from the 2007 mid-year survey, in which a very small minority expected to see a significant increase in defaults. 'Softening economic growth and the credit crunch are weighing heavily on the minds of investors and understandably so,' said Managing Director and head of Credit Market Research Mariarosa Verde. 'Investors realize that current gloomy conditions, especially if prolonged, will provide more than enough fuel for rising defaults.'"


Post a Comment

<< Home

Site Meter