The Wall Street Journal-20080116-Credit Crunch- S-amp-P Raises Projections Of Sour Subprime Loans
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Credit Crunch: S&P Raises Projections Of Sour Subprime Loans
There may be another wave of credit-rating downgrades of subprime- mortgage securities.
Standard & Poor's Corp. yesterday sharply raised its projected losses for subprime mortgages made in 2006 to 19% from 14%, as loan delinquencies are rising. Those mortgages were important building blocks in billions of dollars worth of mortgage-backed securities issued that year.
Analysts said the rating company's new loss expectations are much closer to the bearish scenario implied by the depressed values of the ABX index, a market index made up of derivatives tied to subprime bonds.
The change indicates S&P may cut ratings on many more subprime residential mortgage-backed securities, a move that would also affect collateralized debt obligations that hold them and banks and bond insurers that are exposed to these assets.
"I imagine there will be more downgrades arising from this," said Kevin Cavin, a mortgage strategist at FTN Financial Capital Markets in Chicago, adding that many mortgage bonds with high double-A ratings could be hurt.
Investors track the loss expectations of rating companies closely to understand how the credit ratings of the securities they hold might change. In July, when S&P raised its subprime-loss expectations to between 11% and 14%, it marked a turning point for the mortgage-debt market as investors realized that a tsunami of downgrades could severely hurt the values of their investments. Many Wall Street analysts' loss estimates for 2006 subprime loans are between 10% and 15%, making the rating service more bearish.
Despite its deteriorating outlook for the housing market, S&P said actual losses among 2006 subprime loans totaled just 1.13% at the end of 2007, a number below its expectations.
S&P has slashed ratings on the bulk of 2006 subprime-mortgage bonds that were originally rated triple-B, but most double-A and triple-A bonds haven't been affected. The rating company's new loss estimates now suggest that many double-A bonds would be downgraded because losses may eat significantly into the cushions below them.
But monthly performance data indicate that 28.8% of loans were delinquent, and the numbers are still rising. In addition, falling house prices are widening the losses on foreclosures by reducing the amount lenders and mortgage investors can recover.
Many subprime loans made during the past few years were bundled together into giant billion-dollar pools. These pools were used to back debt securities that were sliced into pieces with differing amounts of risk and return.
