One on One with David Wyss, Chief Economist of S&P
Tuesday, July 10, 2007
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SUSIE GHARIB: More analysis now on that sub-prime credit watch by Standard & Poor's. Joining us, David Wyss, chief economist of S&P. Hi, David.
DAVID WYSS, CHIEF ECONOMIST, STANDARD & POOR'S: Good evening.
GHARIB: Let's begin by getting your reasons of why S&P put these mortgage- backed securities on negative credit watch.
WYSS: Well, the basic reasoning is they're simply not performing as well as we expected. The housing market is not turning around in a hurry. We didn't really expect it to. Home prices still have a ways to drop. And we're already seeing substantially higher default rates on these securities than we had anticipated at this point. So it was time to move them.
GHARIB: But why now? All of these factors that you've mentioned have been going on in the housing sector has been struggling for some time, why now?
WYSS: Well, largely because we need to get enough record on these securities to see how they're performing. We knew the housing sector was underperforming. We knew that when we rated these securities. But what surprised us is that even given the poor performance for the housing sector, the default rates are running higher than we would have expected given the FICO scores here, given the loan-to-value ratios in these mortgages.
GHARIB: Now I understand that there are 612 mortgage securities on your credit watch list. And you're reviewing them and some of them will be downgraded. How many of them will be downgraded do you think?
WYSS: Well, if we knew that we wouldn't have to put them on credit watch. But I would say, you know, the great majority. My personal guess would be at least 90 percent. Let's keep this in perspective. We're looking at $12 billion. That sounds like a lot of money -- it is a lot of money to most of us. It's only 2 percent of the sub-prime securities we rated during that period. And it's 0.01 percent of the U.S. mortgage market.
GHARIB: All right. So if it's 2 percent, then how serious is this announcement that you made today? How worried should investors be?
WYSS: I don't think you should be worried generally, but obviously what we do worry about, is there a concentration of this risk that has built up in some of the hedge funds, for example, that could cause problems.
GHARIB: Well, how exposed are hedge funds and also banks and insurance companies that hold these securities?
WYSS: Well, one of the problems is we don't really know. We have a pretty good idea for the banks and the insurance companies. And for them we think this is a minor problem. But the hedge funds by their nature don't have to tell us what they hold. And as a result, we just don't know what they've got.
GHARIB: You know, David, a lot of economists that we've talked to on this program, I've asked them about the spillover effect of this whole sub-prime crisis on the economy and now this is a new development. Is there a spillover on the economy?
WYSS: So far we aren't seeing much. Obviously there's an impact on the housing market itself. There's an impact on employment in the construction industry, but except for stuff that's really closely related to the sale of a house, furniture, appliances, building materials, we aren't seeing much impact on consumer spending or on business investment.
GHARIB: So then what does this mean? We saw stocks really sell off today. And investors were unloading financial firms, you know, that sort of thing. So what is the impact of all of this for investors and for American consumers if at all?
WYSS: Well, I don't think there's much direct impact on the consumer except to the value of his house which is going down. But we already knew that. We're worried that -- obviously about the hedge fund build-up and whether there are some financial institutions, probably not banks or insurance companies but possibly on Wall Street that are exposed to certainly the worries that were enhanced by Bear Stearns' (BSC) recent problems.
GHARIB: All right. David, thank you very much. You've cleared up a very complicated subject. My guest tonight David Wyss, chief economist of Standard & Poor's.
