Moody’s raises subprime loss expectations

From the Wall Street Journal:

Subprime-Loan Losses Are Seen Expanding
Moody’s Cites Weakness In Home-Price Outlook; Treasury Bonds Benefit
By SERENA NG and DAVID REILLY
February 1, 2008; Page C2

A worsening outlook for the housing market led Moody’s Investors Service to ratchet up its projections for losses among subprime loans yet again. The move, along with a tsunami of mortgage-debt downgrades from Standard & Poor’s the day before, sent ripples through the credit markets.

Debt investors shrugged off a stock-market rally and sought refuge in safe Treasury bonds. The ABX indexes that track subprime-mortgage bonds gave back some of their gains of the past week, and even some bonds backed by high-quality agency mortgages dropped in value.

Moody’s said it now expects total losses on subprime mortgages taken out in 2006 to be between 14% and 18%, though some bundles of subprime loans that were used to back securities could see losses as high as 35%. In October the New York ratings firm said it expected average losses on subprime loans to range from 6.6% to 15%.

The loss estimates are at the core of many of the problems washing through Wall Street. As the outlook for mortgage losses deteriorates, rating services downgrade more bonds. And as the banks that hold mortgage securities ratchet up their own loss estimates, they have been announcing ever-increasing write-downs.

Moody’s revision was prompted by rising numbers of subprime borrowers who have stopped making payments on their mortgages. It is also driven by the deteriorating outlook for home prices. Home-price declines depress the amounts that can be recovered from defaulted loans after homes are foreclosed upon and sold.