S&P to speed mortgage warnings

S&P to speed mortgage warnings

The ratings company, responding to rising delinquencies, will alert bond investors before foreclosures occur.

From Bloomberg News

In another sign of growing concern about mortgages made to high-risk borrowers, Standard & Poor's said it would no longer wait for homes to be foreclosed on and sold at a loss before alerting investors in mortgage-backed bonds that it expects to lower ratings on the bonds.
The ratings company now will consider issuing downgrade warnings based on the amount of loans that are delinquent, in foreclosure proceedings or already backed by seized property, Robert Pollsen, an analyst at the New York-based firm, said during a conference call with investors Thursday.
S&P will assume that none of the borrowers more than 90 days late will resume paying their mortgages, he said.
The firm is reacting to rising delinquencies and defaults on the riskiest types of home loans made in 2006. Many of those loans were packaged and sold to investors via mortgage-backed securities that pass interest through to the investors.
S&P said Wednesday that it was considering downgrades on 18 low-rated bonds from 11 securitizations of mortgages last year amid early loan problems.
"It is a watershed event" because it means S&P is now actively considering downgrading bonds within their first year, said Daniel Nigro, a portfolio manager at Dynamic Credit Partners, a manager of about $6 billion in hedge funds and collateralized debt obligations. "We welcome them being more open" about their methods.
The riskiest mortgages made last year are experiencing more delinquencies than ones from previous years at comparable ages, after a period in which some lenders lowered standards to attract business and home-price growth slowed from record levels in many regions.
S&P's warnings Wednesday were on bonds backed by so-called sub-prime and Alt-A loans, and by home-equity loans.
Sub-prime loans are those made to people with imperfect or poor credit histories.
Alt-A loans are defined as ones that fall only slightly short of the credit standards of Fannie Mae and Freddie Mac, the two largest U.S. mortgage firms.
Borrowers are 60 days or more behind on payments on 11-month-old 2006 sub-prime mortgages that represent 8.2% of the loans' total original balances, Steven Abrahams, an analyst at brokerage Bear Stearns Cos., wrote in a report this week.
The levels were "well ahead of the second-place class of 2000," whose problems totaled 5.2% at the same point, Abrahams wrote. "Given the underwriting legacy already in the pipeline and the tendency for serious delinquencies to develop slowly, news about sub-prime is likely to continue for months."
Probably the biggest issue is that many of the sub-prime loans were given out with small or no down payments through the use of "piggyback" home-equity loans, said Ernestine Warner, an S&P analyst.
In mid-2006, S&P began requiring more protection for bond investors when mortgages with piggyback down payments were included in securities, after finding they were 50% more likely to default. Santa Monica-based Fremont General Corp. this week eliminated so-called combo loan programs.
One of the bonds S&P warned about this week was backed by Alt-A mortgages. It was the company's first warning about any of those securities sold in 2006.
Alt-A loans often are made with less proof of borrowers' pay, or are interest-only loans or "option" adjustable-rate mortgages, whose payments can fail to cover the interest owed.
"In terms of performance, I'd say there are equal concerns" about Alt-A loans and sub-prime loans at S&P based on early delinquencies, Warner said.
The Alt-A bond S&P warned about was issued by Calabasas-based Countrywide Financial Corp., the largest U.S. mortgage lender. Newport Beach-based Impac Mortgage Holdings Inc. made the loans.
Before Wednesday, S&P had already told investors it might downgrade several low-rated sub-prime and home-equity mortgage bonds created last year.
Competitors Moody's Investors Service, Fitch Ratings and Dominion Bond Rating Service also have notified investors they're considering downgrades on similar bonds.
The firms' announcements were a departure from past practices of waiting for at least one year from issuance to review their initial assessments about the quality of a mortgage bond.