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Tuesday, July 10, 2007

S&P May Cut $12 Billion of Subprime Mortgage Bonds

The first of many downgrades.

" Standard & Poor's said it may cut credit ratings on $12 billion in bonds backed by subprime mortgages because losses will rise beyond its previous expectations. Ratings of 612 classes of residential mortgage-backed securities were placed on CreditWatch with negative implications, New York-based S&P said today in an e-mailed statement.

The bonds represent 2.1 percent of the $565.3 billion of similar bonds rated by S&P during 2006.Standard & Poor's didn't do this willingly. It took quite a bit of verbal abuse. Investors have criticized S&P, Moody's Investors Service and Fitch Ratings because their ratings on bonds backed by mortgages to people with poor or limited credit don't reflect the fastest default rate in a decade. Prices of some bonds backed by subprime mortgages have declined by more than 50 cents on the dollar in the past few months while their credit ratings haven't changed. "

S&P learned some obvious lessons.

" S&P said it also plans to change the methods it uses to rate existing and new mortgage bonds to reflect the increased likelihood of mortgage defaults and losses. "

The big boys bought their precious time though. They should either be out, hedged or outright short by now...

" "S&P's actions are going to force a lot more people to come to Jesus,'' said Christopher Whalen, an analyst at Institutional Risk Analytics in Hawthorne, California. "When a ratings agency puts a whole class on watch, it will force all the credit officers to get off their butts and reevaluate everything. This could be one of the triggers we've been waiting for.'' "

Source: S&P May Cut $12 Billion of Subprime Mortgage Bonds (Update1) (http://www.bloomberg.com/apps/news?pid=20601087&sid=aZQFKZhqnUZk&refer=home)