Losses on complex securities backed by mortgages will eventually exceed $265 billion, with losses spreading from Wall Street investment firms to regional banks, credit unions and Fannie Mae and Freddie Mac, Standard & Poor’s Ratings Services said in a report.
The rating agency announced Wednesday it was downgrading or placing on a list for possible downgrades $534 billion in mortgage-backed securities (MBS) and $264 billion in collateralized debt obligations (CDOs),
Not all of the investments subject to downgrades may end up losing money, but Standard & Poor’s is taking a more cautious stance, with economist David Wyss forecasting home-price declines of 13 percent by the end of the year, bottoming out no sooner than the first quarter of 2009, the Wall Street Journal reported.
Standard & Poor’s posted lists of the 6,389 affected classes of MBS and 1,953 CDOs on the company’s Web site, but restricted access to the accompanying analysis, “The Subprime, Mortgage, And Credit Markets: Actions And Insights From Standard & Poor’s” to paying subscribers.
The Journal reported that the ratings action affects 47 percent of all subprime mortgage bonds rated by Standard & Poor’s in 2006 and the first half of 2007, and that 3,787 classes of MBS were downgraded and another 2,602 placed on “Credit Watch negative” for possible downgrade.
The news came as bond insurer MBIA Inc reported a $2.3 billion fourth-quarter loss after writing down by $3.5 billion the fair value of CDOs. The write-downs were undertaken in part because of past downgrades of those securities by rating agencies.
In their quarterly report to investors, MBIA executives said the write-downs won’t necessarily translate into losses, and that the company has increased its capital surpluses by more than $2 billion in an attempt to keep the AAA financial strength rating of the company itself.
“MBIA continues to believe that the balance of the mark-to-market losses are not predictive of future claims and, in the absence of further credit impairment, the cumulative marks should reverse over the remaining life of the insured credit derivatives,” the company said.
Earlier this month, Standard & Poor’s analysts said mortgage and bond insurers could face losses 20 percent greater than previously estimated, and placed on “negative outlook” the AAA financial strength ratings of MBIA Insurance Corp., Ambac Assurance Corp., CIFG Guaranty and XL Capital Assurance. Standard & Poor’s also placed the AAA financial strength rating of Financial Guaranty Insurance Co. on “Credit Watch negative,” for possible downgrade (see Inman News story).
Insurers have more difficulty borrowing money and attracting investors if they lose their AAA financial strength ratings, and could lose their ability to guarantee more mortgages and bonds.
Fitch Ratings has a stable outlook on its AAA rating of MBIA, and the bond insurer said it would continue to work with Moody’s Investor Services, which has placed the company’s AAA rating on review for possible downgrade.
In a separate announcement, MBIA said it had raised $1.5 billion in capital in recent months, including a $1 billion surplus notes offering and a $500 million sale of common stock at $31 per share to the investment firm Warburg Pincus, which has agreed to invest an additional $500 million in MBIA.
On Thursday, Fitch Ratings downgraded FGIC Corp. and its financial guaranty insurance subsidiaries Financial Guaranty Insurance Co. and FGIC UK Ltd.
Fitch analysts said they downgraded FGIC’s insurer financial strength rating from AAA to AA, saying the company would have had to raise $1.3 billion to keep the higher rating due to “rapid credit deterioration” in insured CDOs backed by subprime MBS and direct exposure to prime, second-lien mortgages. Fitch had previously issued downgrades of Ambac and Security Capital Assurance Ltd.