Nantucket Real Estate Agent Blog

Moody’s Reviews $143 Billion of Jumbo-Mortgage Bonds

By Jody Shenn

Dec. 18 (Bloomberg) -- Moody’s Investors Service placed $143 billion of jumbo-mortgage bonds under review for downgrades because of higher loss projections as stock-market losses and pay cuts squeeze wealthy borrowers.

Grades of senior securities issued in 2005 will be most affected by the new loan-loss projections, the New York-based ratings company said in a statement dated yesterday. It now expects losses of 3.8 percent on loans underlying 2005 prime- jumbo bonds, with estimates of 8 percent for 2006 securitizations, 10.9 percent for 2007 debt and 12.3 percent for 2008 securities.

The revisions were prompted by “the rapidly deteriorating performance of jumbo pools in conjunction with macroeconomic conditions that remain under duress,” Moody’s said.

Recent jumps in “serious delinquencies” among jumbo loans will be compounded by weakness in the housing market and economy, the company said. An “overhang of impending foreclosures will impact home prices negatively,” with values likely to decline 9 percent more before bottoming in the second half of 2010, Moody’s said. At the same time, U.S. unemployment will rise to peak at about 10.6 percent, said the firm, which had earlier forecast the jobless rate cresting at 9.8 percent.

Moody’s also said it expects the U.S. government’s effort to curb foreclosures to be less effective than it previously expected because the programs have “failed to gain traction.”

Jumbo Loan Limits

Jumbo home-loans are larger than government-supported mortgage companies Fannie Mae or Freddie Mac can finance. Their limits now range from $417,000 in most places to as much as $729,750 in high-cost areas.

Ratings reductions typically boost the capital needs of bondholders such as banks and insurers and force some investors to sell debt. Moody’s and Standard & Poor’s, criticized by lawmakers for assigning top grades to mortgage debt proven too high by later defaults, have already cut ratings on hundreds of billions of dollars of notes in the $1.6 trillion market for so- called non-agency mortgage bonds, which lack government backing, lowering many securities multiple times.

In its last forecast in March, Moody’s predicted cumulative losses, as a percentage of original loan balances, of 1.7 percent for 2005 jumbo bonds, 3.6 percent for 2006 securities, 5.1 percent for 2007 securitizations and 6.2 percent for 2008 debt.

Home Price Outlook

Since March, serious delinquencies among the pools, as a percentage of original balances, have risen to 3.2 percent from 2.1 percent for 2005 bonds, 6 percent from 3.8 percent for 2006 securities, 7.6 percent from 4.8 percent for 2007 debt, and 7.8 percent from 4.6 percent for the 2008 group, Moody’s said.

The firm’s view that the slump in U.S. home prices is only about three-quarters over contrasts with a Dec. 16 statement by the Federal Reserve that “the housing sector has shown some signs of improvement over recent months.” It’s aligned with forecasts of investors and analysts such as Deutsche Bank AG’s Karen Weaver, whose team in a report yesterday predicted prices will drop an additional 10 percent to 12 percent on average.

An S&P/Case-Shiller index for 20 metropolitan areas showed home values rose in each of the five months through September, climbing 5.2 percent, after a record 33 percent drop from a July 2006 peak. Such gains have been driven by a decline in the share of sales related to “distressed” properties that will reverse, with higher mortgage rates another potential threat to a price rebound, according to the Deutsche Bank report.

New York Forecast

In two of the largest mortgage markets, the New York metropolitan area and Orange County, California, prices likely will fall 29.3 percent and 19.2 percent, respectively, from Sept. 30 levels, the New York-based analysts said.

Prices for the most-expensive homes, in particular, “absolutely haven’t” bottomed, Scott Simon, head of mortgage bonds at Newport Beach, California-based Pacific Investment Management Co., which manages the world’s largest bond fund, said in an interview last month.

The financial-services industry, whose employees bought some of the priciest homes, has been among the most-affected by the recession. While Goldman Sachs Group Inc. set aside a record $16.7 billion in the first nine months of the year for employee bonuses, some Wall Street executives will see pay cuts, according to Johnson Associates Inc., a New York-based compensation-consulting firm.

Yearend bonuses for workers at hedge funds, asset- management firms and insurance companies probably will drop an average 20 percent, the firm said.

The Dow Jones Industrial Average lost more than half its value as it tumbled to a 12-year low in March. The number of U.S. households with a net worth of more than $1 million, not counting primary residences, fell to a five-year low of 6.7 million last year from a record 9.2 million in 2007, according to Spectrem Group, a Chicago-based consulting firm.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.