Standard & Poor's on Monday boosted its expectations for losses on risky loans backing U.S. mortgage securities to as much as 40 percent, suggesting a darkened outlook for the troubled housing market.
The more dire assessment will likely significantly impact bonds originally carrying AAA ratings, S&P said in a report.
Increased assumptions for total losses on subprime and Alt-A residential mortgage-backed securities come amid declines in market value of the debt and a surge in the inventory of bank-owned properties, S&P said.
It is another blow to investors who are already suffering from downgrades to their portfolios over the past two years as the housing market fell to the weakest levels since the 1930s. Many bonds are trading for cents on the dollar as investors value them based only on remaining interest payments that may be received.
S&P boosted loss projections for subprime loans made at the peak of the market in 2006 and 2007 to 32 percent and 40 percent from 25 percent and 31 percent, respectively. For 2005 loans, loss projections rose to 14 percent from 10.5 percent.
For Alt-A loans, which were made to borrowers that provided reduced proof of their ability to repay, loss projections for 2006 and 2007 mortgages rose to 22.5 percent and 27 percent from 17.3 percent and 21 percent, respectively. S&P expects Alt-A loans from 2005 to post losses of 10 percent, up from its previous estimate of 7.75 percent.
Loss severities, which include the costs to foreclose and liquidate a home and declines in property value, are expected to rise to 70 percent for 2006 and 2007 subprime bonds and 60 percent for Alt-A bonds issued in those years, S&P added. Some severities have already exceeded 100 percent, it said.
We have observed increases in loss severities and we expect them to continue to rise until we reach the trough of the market value decline, which we believe will be in the first half of 2010, S&P said in the report.
Rating companies, including S&P, have frequently revised expectations for losses on subprime, Alt-A and prime loans to reflect the deteriorating environment since 2006.
S&P said it now forecasts defaults on subprime loans issued in 2005, 2006 and 2007 at 11 percent, 30 percent and 49 percent, respectively. (Reporting by Al Yoon; Editing by Leslie Adler)