In a move reflecting widening stress in the U.S. housing market, Moody’s Investors Service said Thursday it may downgrade $240.7 billion of securities backed by prime-quality "jumbo" U.S. residential mortgages because defaults will be higher than 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 said it may downgrade 4,988 classes of jumbo residential mortgage-backed securities with an outstanding balance of $173.3 billion, versus the original $240.7 billion.
The securities under review are backed by U.S. home loans issued between 2005 and 2008. Moody’s had late last year downgraded $110 billion of securities issued in 2006 and 2007, almost all of which had originally been rated "Aaa."
In a separate action Thursday, Standard & Poor’s downgraded 163 classes of jumbo mortgage debt issued in 2006 and 2007.
Moody’s said it now expects cumulative losses of 1.7 percent for 2005 securitizations, 3.55 percent for 2006, 5.05 percent for 2007 and 6.20 percent for 2008.
Downgrades can force some investors to sell the debt, and increase capital strains on banks and insurers that own it.
In the fourth quarter, the top 50 U.S. banks added $109 billion of mortgage debt, although most was not jumbo mortgage debt, Barclays Capital said. Falling mortgage rates could spur an increased supply of jumbo mortgage securities, it said.
The average 30-year mortgage rate this week fell below 5 percent for the first time since January, mortgage financier Freddie Mac said.
Shares of Hudson City Bancorp, the largest U.S. savings and loan and a jumbo mortgage specialist, fell 48 cents, or 4 percent, to $11.54 in afternoon trading.
The Paramus, New Jersey-based thrift on Wednesday had said first-quarter profit could be similar to the record $124.3 million in the fourth quarter, and in line with analyst forecasts, despite rising loan losses. Hudson City was not immediately available for comment Thursday.
Another jumbo mortgage specialist, Thornburg Mortgage, on Tuesday said it might file for Chapter 11 bankruptcy protection.
Moody’s said 70 percent of the 2005 senior mortgage securities it rates 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 to 2008 "will likely be completely written down."
The credit rating agency said its forecast takes into account low prepayment rates, rising unemployment, and falling housing prices. It said home prices have fallen 25 percent from their peaks and could drop another 11 percent by the end of 2009, when prices in many U.S. regions may bottom out. (Reuters)
