Moody's may cut $241 billion jumbo mortgage debt

NEW YORK, March 19 Thu Mar 19, 2009 7:52am EDT

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NEW YORK, March 19 (Reuters) - In a move reflecting widening stress in the U.S. housing market, Moody's Investors Service on Thursday said it may downgrade $240.7 billion of securities backed by prime-quality "jumbo" U.S. residential mortgages because defaults will be higher than they expected.

Jumbo mortgages are typically larger than $417,000, and go to borrowers with good credit. But Moody's said in the last six months, there have been "substantial increases in serious delinquencies and decreases in prepayment rates, levels that are unprecedented in this asset class."

Moody's put on review for downgrade 4,988 tranches of jumbo residential mortgage-backed securities with a current outstanding balance of $173.3 billion, and an original balance of $240.7 billion. The securities are backed by mortgages issued between 2005 and 2008.

The credit rating agency said it now expects losses of 1.7 percent for 2005 securitizations, 3.55 percent for 2006, 5.05 percent for 2007 and 6.20 percent for 2008.

It said 70 percent of the 2005 senior securities will likely remain investment-grade, with the rest falling to "junk." Securities issued later may suffer deeper downgrades. Moody's also said subordinated securities from 2006, 2007 and 2008 transactions "will likely be completely written down."

The credit rating agency said its forecast takes into account falling home prices, rising unemployment and "limited" refinancing options.

Moody's said home prices have already fallen 25 percent from their peaks and could drop another 11 percent by year end, when prices in many parts of the United States may bottom out.

Thornburg Mortgage Inc THMR.PK, a large U.S. jumbo mortgage specialist, on Tuesday said it might file for Chapter 11 bankruptcy protection, and was in talks with its lenders to renegotiate various agreements. (Reporting by Jonathan Stempel; Editing by Kenneth Barry)

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