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S&P cuts, may cut up to $534 billion of subprime bonds
January 31, 2008 / 12:18 AM / 10 years ago

S&P cuts, may cut up to $534 billion of subprime bonds

NEW YORK (Reuters) - Standard & Poor’s on Wednesday said it cut or may cut its ratings on $270 billion worth of U.S. mortgage-backed securities while putting $264 billion of collateralized debt obligations on watch for a possible downgrade.

The ratings action affects 6,389 classes of U.S. residential mortgage-backed securities backed by first-lien subprime loans and 1,953 ratings from 572 global CDOs backed by asset-backed securities and other CDOs.

S&P’s actions on mortgage-backed securities follow its announcement on January 15 of further changes and planned changes to its methods for analyzing mortgage-backed securities and CDOs, respectively.

Earlier this month, S&P raised its expectations of losses on subprime loans originated in 2006 to 19 percent from 14 percent.

“Today’s rating actions incorporate our most recent economic assumptions and reflect our expectation of further defaults and losses on the underlying mortgage loans,” S&P said.

S&P slashed the ratings on $34.7 billion of RMBS originated in 2006 while placing another $136 billion under review for potential downgrade. In addition, S&P cut $15.4 billion of RMBS securities from 2007, while placing $34.8 billion on review for downgrade, it said. In addition, it affirmed the ratings on 1,735 RMBS classes from 2006 and 691 RMBS tranches from 2007.

The rating agency said the CDO downgrades and credit reviews were a result of RMBS credit deterioration and overall stress affecting the residential mortgage market. CDO managers were large buyers of RMBS, which they layered into their securities over recent years.

“The housing market, especially the subprime sector, will continue to decline before it improves and housing prices will come under stress,” said S&P. “We expect losses to continue to increase with borrowers experiencing rising loan payments as adjustable rate mortgages reset.”

About $342 billion of mortgages are expected to reset during 2008, the rating agency said.

S&P’s chief economist David Wyss has adjusted his projection, forecasting that the end of 2008 property values will have declined by as much as 13 percent, on average since 2006, and the market will bottom out in early 2009.

The rating agency said it does not anticipate further major rating actions on 2006 subprime RMBS or securities issued in the first half of 2007. It will now concentrate on RMBS transactions supported by Alt-A and prime mortgage loan collateral over the next few weeks and hopes to release its results on those segments in the next two months.

In addition, it expects to conclude its review of CDO transactions over the next six weeks. About 2,880 classes from 719 CDOs remain under review.

The rating firm will hold a conference call at 11:00 a.m. on Thursday about the rating actions.

Reporting by Neil Shah, Nancy Leinfuss; Editing by Diane Craft

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