Subprime loans re-evaluated

Moody's lowers credit ratings on $5.2 billion in bonds; S&P may follow

NEW YORK -- Moody's Investors Service lowered the credit ratings on $5.2 billion of bonds backed by subprime mortgages, and Standard & Poor's said it may cut ratings on $12 billion as the companies seek to deflect criticism they were too slow to act as home-loan defaults rose.

Both agencies said they made the moves because borrowers are missing mortgage payments at levels much higher than anticipated.

The concern is significant because the bonds -- many sold by some of Wall Street's biggest banks -- represent a principal source of financing for the housing market. Lower ratings for mortgage-backed bonds could cause a domino effect that might ultimately strangle what until this year was a major propellent of home prices: easy access to money.

Moody's lowered its rating on 399 of the bonds, known as residential mortgage-backed securities, and said it may downgrade 32 more. All of the bonds were issued in 2006.

Standard & Poor's Ratings Service said it may slash its rating on 612 classes of mortgage-backed bonds issued by such banks as Citigroup, Bear Stearns, Lehman Brothers, Morgan Stanley, Merrill Lynch and JPMorgan Chase.

The ratings services are focusing on bonds backed by subprime mortgage debt, or loans to people with limited or poor credit histories. Subprime borrowers collectively have missed a lot more payments on loans amid higher interest rates and a slowdown in the economy.

The subprime mortgage industry has deteriorated more drastically than expected, S&P said, and it does not expect poor credit performance to improve soon. Subprime lenders adopted more lenient lending standards during the housing run-up, S&P said, and many home buyers painted a false picture of their credit when they borrowed money.

S&P's review also affects collateralized-debt obligations, which are complex securities that splice several kinds of debt into layers of risk.

The subprime mortgage market began collapsing in February when HSBC Holdings and New Century Financial reported mounting payment defaults had choked a lot of value from the banks' loan portfolios.

Dozens of subprime lenders have since gone bankrupt as banks have become more reluctant to put money behind risky mortgage loans.

S&P chief economist David Wyss said he expects an 8 percent decline in home prices between 2006 and 2008. Lower home prices can exacerbate credit problems because people having trouble repaying their loans cannot tap the equity in their homes for as much cash.

(Bloomberg News contributed to this report.)