More Subprime Mortgage Loans Likely to Be Downgraded by Moody

In a recent article, Bloomberg reported that Moody’s Investors Service said it’s reviewing all 2005, 2006 and 2007 bonds on subprime mortgages for credit-rating downgrades, covering debt with $680 billion in original balances. The review reflects an increase in Moody’s expected losses on the underlying loan pools, the New York-based company said in a statement today. Losses for such home mortgage backing 2006 securities will probably reach 28% to 32%, up from a previous projection of 22 %, Moody’s said.

The ratings firm said that it boosted expected losses based on “the continued deterioration in home prices, rising loss severities on liquidated loans, persistent elevated default rates, and progressively diminishing prepayment rates.” Reductions in ratings typically boost the capital needs of holders such as banks and insurers, and force some investors to sell debt. Moody’s and Standard & Poor’s, criticized by Senate Banking Committee Chairman Christopher Dodd and other lawmakers for assigning top grades to home mortgage debt, last year stepped up cuts amid tumbling home prices and soaring defaults. The Obama admistration’s $75 billion mortgage modification plan will have a “mitigating impact” on home loan losses, reflected in its latest estimates, Moody’s said. Losses on sub-prime loans underlying 2006 securities would reach 33% “assuming no government intervention or concerted industry-wide loan modification effort,” according to its statement.

Moody’s last year cut a record 23,713 classes of U.S. dollar-denominated asset-backed securities, mainly subprime and 2nd mortgage bonds, or $1.4 trillion by original balances, compared with a record $99 billion the previous year, according to a January report from the company. It cut a record 18,614 of other U.S. residential-mortgage bonds in 2008, with $576 billion in original balances, compared with a previous record of $10.6 billion in 1994, according to a separate report last month. The asset-backed securities total excludes so-called collateralized debt obligations, including ones composed of mortgage bonds, asset-backed commercial paper and commercial- mortgage bonds, as well as Alt-A and jumbo mortgage debt. On Feb. 6, Moody’s started a review of all securities backed by so-called option adjustable rate mortgage loans issued since 2004. For such loans in 2006 securities, losses will reach 27%, Moody’s said. Option ARMs, included in Moody’s Alt-A category, allow borrowers to pay less than the interest they owe, tacking on the difference to their debt and creating the potential for monthly bills to more than double. Subprime home loans went to borrowers with poor credit or high debt. Read the original article written By Jody Shenn.

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