S&P Stops Rating Home Equity Loan Bonds
The agency says losses on existing bond deals are so great it can't figure out how to rate them
May 1, 2008
U.S. credit rating agency Standard & Poor’s said Thursday it will not rate any more new bonds pooling home equity loans to prime and subprime borrowers because losses on some existing bond deals have been so great the agency cannot figure out how to rate the new deals.
Home equity loans not only aided consumer spending in recent years, they helped consumers buy larger homes with less money down through so-called piggy-back mortgages. In some cases, home buyers purchased a home borrowing 80% of the purchase price with a first-lien mortgage and then borrowed 10% or 20% with one or two other loans — second-lien mortgages.
“After reviewing and analyzing the performance data available for U.S. closed-end second-lien mortgage loans and the related residential mortgage-backed securities (RMBS), Standard & Poor's Ratings Services believes that this market segment does not allow for meaningful analysis of new issuance and securitization,” the credit rating agency said in a statement.
“We will not issue any new ratings until we are comfortable with the predictability of the performance,” Adam Tempkin, a spokesman for S&P, told IDD. “We continue to study the performance of closed-end second-lien mortgages and we will not rate any new deals until we have become comfortable in the predictability of future loss performance.”
Referring to the rate of defaults and delinquencies of second lien mortgage debt, Tempkin said the “current [loan and borrower] behavior is anamolous and unprecedented," and it is “for reasons not fully understood.”
The rating agency said in its Thursday statement that the “magnitude of our recent rating actions and projected losses on the 2007 U.S. closed-end second [lien mortgages] vintage transactions reflect an unprecedented level of loan performance deterioration. As a result, we will not rate any new U.S. RMBS closed-end second [lien] transactions or any transactions that contain closed-end second [lien] mortgage loans.”
IDD contacted Fitch and Moody's to see if they will halt their ratings of second-lien mortgage-backed bond deals, but neither agency immediately responded.
S&P started rating bonds backed by fixed-rated home equity loans in the mid-1990s. Last year, the agency rated $17.94 billion worth of second-lien mortgage-backed bonds. This year, a "handful of deals" were in the pipeline, but S&P turned these down, Tempkin told IDD.
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