March 2, 2008 / 9:13 PM / 11 years ago

FACTBOX: No longer "subprime" problem for credit markets

NEW YORK (Reuters) - Loose U.S. mortgage lending standards, rising interest rates in 2006 and falling house prices have resulted in a tsunami of less-creditworthy U.S. borrowers defaulting on their so-called subprime home mortgages and losing their homes, according to industry analysts.

However, many subprime mortgages were packaged into mortgage-backed securities and collateralized debt obligations (CDOs), or bundles of securities with differing yields and credit ratings, which were then sold to hedge funds, banks and pension funds who wanted to diversify their risks.

With the losses on subprime mortgage, the ensuing crisis of confidence in the form of tighter credit conditions has touched many corners of the financial world.

The following is a snapshot of where these markets stand:

AUCTION-RATE SECURITIES

* Auction-rate securities, debt whose rates are reset in periodic auctions, are a key source of funding for everything from municipalities to closed-end funds. The $330 billion market was roiled in late January by actual or threatened rating downgrades of monoline insurers backing the debt.

* Broker-dealers swept up in the credit crunch backed away from their market roles as liquidity providers, leading to failed auctions that pushed interest rates for some issuers as high as 20 percent.

* The number of failed auctions topped 80 percent in mid-February but fell to nearly half that amount by the end of the month, or about $10 billion to $12 billion of debt daily, according to analysts’ estimates.

* About half the market is made up of municipal issuers such as states, student loan providers and hospitals. The other half includes closed-end funds and corporations. Many muni issuers, stung by skyrocketing interest rates, have restructured their troubled debt into fixed- or variable-rate modes or plan to.

* Though rates are easing as some hedge funds and other investors snap up the debt, many states, cities and agencies doubt they will ever sell auction-rate securities again. Others say the product will have to be overhauled to survive.

BOND INSURERS

* U.S. bond insurers are responsible for insuring $2.4 trillion in debt, more than half of it municipal bonds. Their ratings have been under pressure after the insurers guaranteed repackaged subprime mortgage bonds and other risky debt.

* The loss of their top “AAA” ratings would result in downgrades to the debt they insure, which in some cases may require that it be sold.

* Concerns about the two largest U.S. bond insurers, MBIA Inc (MBI.N) and Ambac Financial Group ABK.N, have eased somewhat since late February when Standard & Poor’s and Moody’s Investors Service affirmed their “AAA” ratings on MBIA and S&P indicated Ambac was in a better position to raise capital.

* Some insurers, including MBIA and FGIC, have indicated they plan to separate municipal insurance businesses from their structured finance arms, which includes exposure to risky mortgage-backed debt. This plan would likely protect the value of municipal debt insurance, but lead to downgrades of the structured finance units.

* Investment banks that bought protection from bond insurers on CDOs, including mortgage-backed debt, are exposed to as much as $30 billion in losses from writing down the value of insurance wraps. Analysts have said Merrill Lynch & Co MER.N, UBS UBSN.VX and Citigroup Inc (C.N) are among the most exposed to losses from CDOs insured by bond insurers.

CDOs

* At the heart of the easy money gushing to mortgage borrowers and buyout shops in recent years was unquenchable demand for CDOs, complex securities whose sales skyrocketed above $500 billion in 2006 from $84 billion in 2002.

* With defaults by subprime borrowers rising, prices for subprime-related bonds and CDOs have plummeted, and ratings have been slashed on billions of dollars of debt. The downgrades have essentially frozen the once-$1 trillion CDO market, leaving investors and brokerage houses holding hard-to-value assets they are reluctant to sell at fire-sale prices.

* As the U.S. economy slows and foreclosures jump, CDO ratings and prices are likely to deteriorate further. S&P in January said it may cut ratings on $264 billion of CDOs, while sales of new CDOs that month fell to their lowest monthly volume in 10 years, or $1.3 billion, according to Morgan Stanley (MS.N).

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