Warning on home-backed bonds
By Saskia Scholtes in New York
Copyright The Financial Times Limited 2006
Published: December 22 2006 02:00 | Last updated: December 22 2006 02:00
Bonds backed by risky US "subprime" mortgages were downgraded in record numbers in the fourth quarter, Fitch Ratings said yesterday, the latest in a series of ominous signals for the fast-growing sector.
Two such mortgage lenders have failed this month.
Subprime mortgages are higher-interest loans made to borrowers seen as risky because of their credit history or debt levels. The loans are often packaged into securities and sold to investors to help lenders reduce their risks. More than $500bn of these securities have been issued this year.
In recent months, a growing number of the underlying borrowers have fallen behind on payments. Fitch has downgraded 100 of these securities since October and expects further deterioration in 2007.
Grant Bailey, analyst at Fitch, said: "The environment for subprime became quite negative in the second half of 2006, because thesector is very sensitive to slowing house price appreciation."
When house prices are rising quickly, Mr Bailey said, struggling borrowers can refinance, consolidate their debt, or sell their homes. But the US housing market slump has meant borrowers have had far fewer options. This is reflected in an almost 50 per cent increase in serious delinquencies on subprime loans this year.
Mortgage lenders have relaxed lending standards in an effort to maintain volumes. Subprime mortgages have been big business for investment banks.
Akhil Mago, mortgage analyst at Lehman Brothers, said: "Excess capacity in the mortgage banking industry, coupled with dramatically lower risk aversion in the capital markets, has taken its toll on underwriting standards."
This means that the most recent crop of loans carry some of the highest risks.
A study from the Center for Responsible Lending foresees one in five subprime mortgages started over the past two years will foreclose.
Earlier this month, California-based Ownit Mortgage Solutions was the latest to shut its doors due to "unfavourable conditions of the mortgage industry".