Moody’s Investors Service lowered the credit ratings on $5.2 billion of bonds backed by subprime mortgages and Standard & Poor’s said it may cut $12 billion of securities after criticism they waited too long to respond to rising home-loan defaults.
Moody’s cut ratings on 399 bonds issued in 2006 and said it may reduce rankings on another 32. S&P is preparing to lower the ratings on 2.1 percent of the $565.3 billion of subprime bonds issued from late 2005 through 2006, citing a deepening housing slump. U.S. Treasuries rose, the dollar slumped and financial company shares led stocks lower.
Ratings changes “are going to force a lot more people to come to Jesus,” said Christopher Whalen, an analyst at Institutional Risk Analytics in Hawthorne, Calif. “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.”
Investors criticized S&P, Moody’s 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.
The actions would be the biggest ever in the subprime market, the companies said. Insurers and pension funds may be among investors required to sell their bonds if they are downgraded, potentially driving down prices of $800 billion in subprime mortgages and $1 trillion of collateralized debt obligations, which package mortgage bonds into new securities.
S&P said it is also reviewing the “global universe” of CDOs that contain subprime mortgages. Investors in CDOs alone stand to lose as much as $250 billion, according to Institutional Risk Analytics, which writes computer programs for auditors.
