S&P May Cut Grades of 7,077 Mortgage Bonds After Raising Projected Losses

Standard and Poor's is on the verge of downgrading almost 7,077 classes of U.S. home securities after loss projections were updated for the year for deals done in 2005, 2006, and 2007. Many rated AAA grades during these years have already been brought down to junk status.

By Jody Shenn
May 11, 2011 11:07 AM MT

Standard & Poor’s may downgrade 7,077 classes of U.S. home-loan securities, after updating its loss projections for deals issued during 2005, 2006 and 2007.

The review covers bonds from 1,384 securitizations of prime, subprime and Alt-A mortgages, the New York-based ratings company said today in a statement.

“We expect to review these transactions and resolve the CreditWatch placements over the next several months,” said S&P, which didn’t provide the amount of debt affected.

Most so-called non-agency mortgage securities issued during the period have already lost their original investment-grade ratings. About 90 percent of subprime-mortgage bonds granted AAA grades when created in 2006 and 2007 were later cut to junk status, a Senate investigative panel said in a report last month, which said inflated grades contributed to the worst financial crisis since the 1930s.

Downgrades can boost the capital needs of banks holding the bonds and force some investors to sell debt. While diminished, the dynamic can damage the market, with recent cuts by Moody’s Investors Service on older subprime bonds with higher ratings leading to sales, said Karlis Ulmanis a bond manager at Wilmington, Delaware-based DuPont Capital Management, which oversees about $27 billion.

‘Forced to Sell’

“As many of these fell below investment grade, investors were forced to sell them as they fell outside their investment guidelines,” said Ulmanis, who holds more than $100 million of subprime bonds and added some securities as a result of the sales.

Non-agency mortgage securities lack guarantees from government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae. Subprime loans went to the least creditworthy borrowers; Alt-A loans, a step up, were often granted to homeowners who failed to document their incomes. Prime non- agency bonds typically packaged “jumbo” loans larger than Fannie Mae and Freddie Mac can finance.

S&P released its updated non-agency loss projections in a March 25 report. For 2007 subprime bonds, expected loan losses rose to 48.5 percent of original balances, from 43.2 percent in a 2010 report. For Alt-A securities of that vintage, expected loan losses, climbed to 36 percent from 31.3 percent. For 2007 prime debt, expected loan losses rose to 11.8 percent, from 9.8 percent.

To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net;

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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