Ratings agencies scramble to reassess subprime risk

By Walden Siew

NEW YORK (Reuters) - Rating companies began a new wave of rating cuts Thursday as they reassessed the fallout from deteriorating subprime loans, drawing increased scrutiny from investors who are questioning why the agencies failed to act earlier.

Moody's Investors Service and Standard & Poor's are ratcheting down ratings or revising downward prior forecasts on billions of dollars of debt due to their lowered outlooks on the U.S. housing market.

S&P on Thursday cut ratings on $5.7 billion of subprime-related securities it put on watch earlier this week. Both S&P and Moody's now project cumulative losses for subprime loans originated in 2006 to reach as high as 14 percent, more than double projections at the start of the year.

"That's a huge change in their projections and has huge implications for the market," said Inna Koren, an analyst at Barclays Capital in New York.

Fitch Ratings also on Thursday said it may cut ratings on 19 collateralized debt obligations -- debt structures that are backed by risky home loans -- and has revised its CDO rating methodology, identifying 170 U.S. subprime transactions as requiring further analysis.

Of those, the total amount of bonds rated in the "BBB" category and below -- the most likely to face rating actions -- is $7.1 billion. For details, see ID:nN12252357.

CDOs are debt structures that bundle other types of debt, including junk bonds or securities backed by pools of risky home loans.

CONFERENCE CALLS

Moody's on its conference call on Thursday said it is also raising its expectations for losses on several types of subprime mortgages, which could lead it to cut more ratings.

The agency is increasing its loss expectations for newly originated loans by 10 percent, and for other loans to as high as 25 percent, according to Nicolas Weill, Moody's team managing director and chief credit officer.

Moody's and its rivals S&P and Fitch are increasingly being criticized for not lowering ratings earlier as delinquencies on loans granted to less creditworthy home buyers have risen.

"Why now?" Steven Eisman, a portfolio manager at Frontpoint Partners in New York, said on an S&P conference call on Tuesday. "The delinquencies have been a disaster for many, many months."

Moody's on Tuesday also cut ratings of 399 mortgage-backed securities and may cut ratings of another 32, affecting a total of $5.2 billion in debt. For details, see ID:nN10336254.

The credit agency also placed 184 tranches of CDOs backed by residential mortgage-backed securities under review for possible downgrade on Wednesday, affecting $5 billion in debt.

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