Falling home prices, rising defaults and evidence that mortgage fraud during the housing boom was more widespread than previously known has Standard & Poor’s considering downgrading its ratings on $7.35 billion in securities backed by subprime loans.

The news that the ratings agency had placed 612 classes of residential mortgage-backed securities on “CreditWatch negative” Tuesday sent Treasury rates up and the dollar down, and could increase the cost of financing a home for some borrowers with blemished credit.

Many of the securities were backed by loans originated by bankrupt New Century Financial Corp. and Fremont General Corp., which had a subprime subsidiary that was shut down by federal regulators in March. Between 75 percent and 80 percent of the loans backing each of the 612 classes placed on CreditWatch negative are subject to “some type of payment adjustment” over the next 18 months.

Standard and Poor’s said the majority of the securities placed on CreditWatch negative Tuesday will be downgraded, a process that will begin in the next few days. The affected securities represent about 1.3 percent of the $565.3 billion in mortgage-backed securities rated by Standard & Poor’s between the fourth quarter of 2005 and the fourth quarter of 2006.

In a report explaining the decision, David Wyss, Standard & Poor’s chief economist, said he expects home prices will decline 8 percent on average between 2006 and 2008, bottoming out in the first quarter of 2008. Standard & Poor’s said its models assume that properties that serve as collateral for some riskier loans will suffer a 22 percent decline in value.

The continued price declines will increase losses on the sale of foreclosed properties, and make it harder for troubled borrowers to refinance or sell their homes to repay their debts, the report said. With lenders tightening underwriting guidelines, there may be fewer opportunities for borrowers with rising loan-to-value ratios to refinance.

“We do not foresee the poor performance abating,” Standard & Poor’s said in the report. “Loss rates, which are being fueled by shifting patterns in loss behavior and further evidence of lower underwriting standards and misrepresentations in the mortgage market, remain in excess of historical precedents and our initial assumptions.”

Total losses on all subprime MBS issued since the fourth quarter of 2005 is 29 basis points, compared with 7 basis points for similar transactions issued in 2000 — until now, the worst performing issues of the decade, the report said.

Moody’s recently downgraded 131 investment securities backed by subprime, second-lien mortgage loans, saying the loans were “originated in an environment of aggressive underwriting and lack protection from homeowner equity.”

Standard & Poor’s said it is revising the methodology is uses in rating the risk to investors presented by mortgage-backed securities and collateralized debt obligations, which could raise the cost of borrowing for those with flawed credit.

Beginning Tuesday, Standard & Poor’s said its cash-flow assumptions will include a simultaneous combination of faster voluntary and involuntary (default) prepayments, and that default expectation for 2/28 hybrid ARM loans will increase by approximately 21 percent.

Standard & Poor’s said it was also considering revising its methods for rating collateralized debt obligations (CDOs), an apparent acknowledgement of recent criticism that it and other ratings agencies such as Moody’s Investors Service and Fitch Ratings failed to accurately assess the risk involved in such securities.

In a scathing critique last month, PIMCO Managing Director Bill Gross said analysts at ratings agencies were “wooed” by makeup and “6-inch hooker heels” into bestowing investment-grade ratings on such investments, when “many of these good-looking girls are not high-class assets worth 100 cents on the dollar.”

One factor complicating the ratings process has been that historical predictors of loan quality — including FICO scores, loan-to-value ratios and ownership status — are proving to be less reliable than in the past, Standard & Poor’s said in its report.

Citing a recent report by the Mortgage Asset Research Institute (MARI), Standard & Poor’s said misrepresentations on credit reports were up significantly in 2006, and that findings of fraud “were in excess of previous industry highs.”

The quality of data on borrowers and loan characteristics provided by lenders to the ratings agencies “has also come under question” Standard & Poor’s said.

“Data quality is fundamental to our rating analysis,” the report said. “The loan performance associated with the data to date has been anomalous in a way that calls into question the accuracy of some of the initial data provided to us regarding the loan and borrower characteristics.”

Last week, Ohio Attorney General Marc Dann said he’d launched an investigation into the role the ratings agencies played in marketing mortgage-backed securities to Ohio’s pension funds. Dann and other critics say the companies rely on data that’s provided by the investment firms and lenders that issue the securities — which also pay the ratings agencies’ fees.

Standard & Poor’s said it will consider using third-party due-diligence firms as part of stepped-up reviews of information provided by lenders.

“Given the level of loosened underwriting at the time of loan origination, misrepresentation and speculative borrower behavior reported for the 2006 vintage, we will be increasing our review of the capabilities of lenders to minimize the potential and incidence of misrepresentation in their loan production,” the report said. “A lender’s fraud-detection capabilities will be a key area of focus for us.”

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