Reuters reported a widening stress in the U.S. housing market, Moody’s Investors Service said on 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 mortgage loans 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.” 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.”
Moody’s on Thursday said it may downgrade 4,988 classes of jumbo residential mortgage loan securities with a current outstanding balance of $173.3 billion, and the original $240.7 billion balance. It said it now expects cumulative losses of 1.7 % for 2005 securitizations, 3.55 % for 2006, 5.05 % for 2007 and 6.20 % for 2008. Downgrades can force some investors to sell the debt, and can increase capital strains on banks and insurance companies that own it. Bad credit mortgages have already been downgraded when the subprime mortgage market crashed a few years back.
The top fifty U.S. banks added $109 billion of mortgage-backed debt in the fourth quarter, although most was not jumbo home loans, Barclays Capital said. Falling mortgage interest rates could spur an increased supply of jumbo mortgage securities, it said.
