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U.S. Subprime Bond Losses May Reach 8% - Fitch

Reuters
Thursday, 29 Mar 2007 | 5:50 AM ET

Losses on U.S. mortgage bonds issued in 2006 against subprime loans could be as high as 8%, the highest forecast in recent memory, an executive said on Thursday.

Roelof Slump, a U.S.-based managing director for the ratings agency, told a conference in Singapore this means mortgage bonds with below-investment grade ratings could be downgraded and even risked default as troubles build up in the subprime housing market. Subprime loans are issued to less creditworthy borrowers.

"2006 may prove to be the worst subprime vintage ever," Slump said, adding that he expects losses of between 6% and 8% in the value of these bonds.

Fitch's loss forecast is slightly higher than Standard & Poor's, which said earlier this week losses on 2006 subprime mortgage bonds could be as high as 7.8%.

Slump said bonds issued against subprime loans account for 15% of the total $2 trillion worth of mortgage-bonds issued in the United States.

Even bonds with ratings of BBB minus and BBB -- which are the lowest investment-grade bonds -- could come under pressure, he said.

But Slump said bonds rated above BBB would not likely default as the agency expects home prices will ease while a recession in the United States was not likely to set in this year or in 2008.

Companies such as Fitch use loss expectations to help decide how much protection a bond must carry.

AAA to BBB

These ratings range from the top "AAA" designation to those below "BBB minus" -- the lowest investment-grade mark.

Slump also warned downgrades would likely outnumber upgrades in 2007, though losses on bonds issued this year would be lower because of tighter underwriting practices by originators.

However, falling interest rates could substantially improve the outlook for bonds, he said.

Slump later told Reuters that problems in the subprime housing market could have an impact on the overall housing sector in the United States.

"We do believe that the very same things that are happening in the subprime market are likely to be happening in the Alt-A market, again driven by home prices." he said.

Alt-A are loans to borrowers with some credit scores, but who provided less than the full documentation required to apply for the loan.

"I am not going to call it a contagion that is spreading, but clearly there is some impact in all of the housing" sector.

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