ills deepen in subprime-bond arena - 06 18 2007

On Friday (06/18/2007), Moody's Investor Service slashed rating of 131 bonds backed by pools of speculative subprime loans because of unusually high rates of defaults and deliqneuencies among the underlying mortgages. The ratings company also said it is reviewing 247 bonds for downgrades, including 111 whose ratings it had just lowered. All the bonds were issued as recently as last year. The latest move by Moodys affaected around $3 bil worth of bonds, represenging less than 1% of $400 bil in subprime mortgage backed bonds. Moody's downgrades so far concentrated among bonds backed by second lien loans, which are taken out on homes that have already been pledged as collateral on another mortgage. Second-lien lenders stand at the back of the line; when borrowers default, it is highly unlikely the loans will recover any money. The housing market continue to deteriorate, and many economists see little hope it will recover before 2008. ABX (price based) tracking risky subprime bonds plunged to an all time low of 60.95. The ABX index was above 97 at the start of this year. Delinquency rate soared to 13.77% from 11.5%. For Bear, the trouble at one of the in-house hedge funds worsened significantly late last week. On Friday, lender ML announced plans to seize $400 mil in collateral from the fund, and auction off its seizure - which comprise mainly securities of CDOs. Analysts say the securities ML and the Bear funds are trying to sell aren't easily traded by investors. As such, they may draw bids that are signiicantly lower than what their sellers are hoping for. The asset sales this week will be closely watchded by WS, especially by hedge funds that hold similar bonds. The prices at which Bear sells its hedge-fund assets could impact how other investors price their own holdings. facts around $36.5 bil in securities backed by second-line loands were created by WS last year, less thaan 10% of the $483 bil in securitiese backe by subprime loands taht were issued. Most subprime bonds are backed by first-lien mortgages, which take a longer time to realize losses because their borrowers have to go through the foreclose proces. About 1.5% of bonds from 2006 that are backed by first-lien subprime mortgasges have been downgraded or are being reviewed by Moodys for downgrades.