By AARON LUCCHETTI and SERENA NG, WSJ.COM
January 31, 2008
Standard & Poor's downgraded or threatened to downgrade more than 8,000 mortgage investments and projected a widening array of financial institutions would ultimately face mortgage-securities losses totaling more than $265 billion.
The new sweep of downgrades -- the largest of several during the past few months -- threatens to create new turmoil in a market already shell-shocked by write-downs of about $100 billion at big financial firms and declines in housing values that have put the economy on the brink of a recession.
S&P suggested that many financial institutions would need to sell some of the bonds affected by yesterday's rating action. In all, it expects losses for financial institutions would more than double from what has already been recognized, affecting many firms that haven't yet acknowledged problems.
"Banks are bracing for another chapter in the unfolding story of their mortgage-market problems," wrote Tanya Azarchs, an S&P analyst, in a report released yesterday after the market closed.
Analysts have said total losses on mortgages -- which would include many that don't go into mortgage-backed securities -- could hit as much $400 billion. S&P's economist, David Wyss, estimated that by the end of 2008, national home-price declines could reach 13% and that the housing market wouldn't bottom until early 2009.
S&P said the new downgrades may not hurt banks that have already taken write-downs, including several large Wall Street firms. Instead, it said, the impact could broaden to regional banks, credit unions, government-sponsored enterprises and some European and Asian banks that haven't yet taken big write-downs.
S&P's rating actions touched on $534 billion in mortgage-related investments, including 47% of the U.S. subprime mortgage bonds rated in 2006 and the first half of 2007. It hit $264 billion in the bond portfolios known as CDOs, or collateralized debt obligations, or 35% of such instruments sold world-wide in that period.
Not all of the bonds put on watch or downgraded will ultimately turn up losses. But the actions signaled the potential for an even more negative outlook than many might have expected.
S&P lowered its rating on 3,787 classes of subprime mortgage bonds and placed the ratings of 2,602 more on "credit watch negative," which means a downgrade is a distinct possibility. It also downgraded or threatened to downgrade 1,953 ratings on collateralized debt obligations, which are backed by mortgage bonds.
The actions threaten the rating of many bonds that carry S&P's top triple-A mark. S&P, a unit of McGraw-Hill Cos., has now placed 69% of the triple-A rated subprime bonds from 2006 on negative watch.
The moves follow a revision in S&P's methodology earlier this month that predicted greater losses among subprime loans sold to investors in mortgage securities during 2006. S&P raised its projection for how much these bonds could lose due to rising mortgage defaults and home price declines.
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