Sunday, February 3, 2008

Moody’s and S&P Are Projecting Increasing Losses in Sub-Prime Mortgages Originated in 2006

This article concerning potential losses for the sub-prime mortgages originated in 2006 dovetails nicely with the post below concerning Alt-A mortgages. The long and short of it is that things continue to get worse. Text in bold is my emphasis: From the WSJ:

A worsening outlook for the housing market led Moody's Investors Service to ratchet up its projections for losses among subprime loans yet again. The move, along with a tsunami of mortgage-debt downgrades from Standard & Poor's the day before, sent ripples through the credit markets.

Moody's said it now expects total losses on subprime mortgages taken out in 2006 to be between 14% and 18%, though some bundles of subprime loans that were used to back securities could see losses as high as 35%. In October the New York ratings firm said it expected average losses on subprime loans to range from 6.6% to 15%.

The loss estimates are at the core of many of the problems washing through Wall Street. As the outlook for mortgage losses deteriorates, rating services downgrade more bonds. And as the banks that hold mortgage securities ratchet up their own loss estimates, they have been announcing ever-increasing write-downs.

Moody's revision was prompted by rising numbers of subprime borrowers who have stopped making payments on their mortgages. It is also driven by the deteriorating outlook for home prices. Home-price declines depress the amounts that can be recovered from defaulted loans after homes are foreclosed upon and sold.

In mid-January, Standard & Poor's also raised its loss expectations for 2006 subprime loans to 19% from an earlier 14% forecast. A loss of 19% suggests that a $1 billion pool of subprime loans will have only $810 million left after the loans have either paid off or defaulted. Following the revision of its loss estimates, S&P on Wednesday downgraded, or threatened to downgrade, over 8,000 mortgage securities originally worth $534 billion.

Those downgrades triggered further S&P rating changes yesterday on a few bond insurers that had written financial guarantees on mortgage securities. S&P cut its triple-A financial-strength rating on Financial Guaranty Insurance Co. to double-A and placed the top ratings of MBIA Inc. and XL Capital Assurance Inc. on reviews for downgrades.

Right now, actual losses on 2006 subprime loans are slightly above 1%. That might sound like a long way from the double-digit losses being projected. But many analysts say it isn't a stretch.

Delinquency rates among 2006 subprime loans are already as high as 27% in some cases. On average, around 17% of subprime loans made in 2006 are over 60 days delinquent, in foreclosure or have been foreclosed upon, according to Moody's. Adam Klauber, director of research in the U.S. for Fox-Pitt Kelton Cochran Caronia Waller, says more-bearish investors still believe losses could top 20%, although that is generally thought to be an extreme outcome. Increased losses among subprime mortgages could signal that losses will creep up among other classes of borrowers, including those to be considered prime, or the least likely to default.

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