Dec. 19 (Bloomberg) -- Standard & Poor's reduced its ratings on about $7 billion of Alt-A mortgage securities, citing a sustained surge in delinquencies during the past five months on loans considered a step above subprime.

The lowered bonds represent about 1 percent of the $694 billion of securities backed by Alt-A mortgages created in 2005 and 2006, the largest ratings company said today in a statement. Countrywide Financial Corp., Bear Stearns Cos., and Lehman Brothers Holdings Inc. issued the most debt downgraded, S&P said.

``These actions reflect a persistent rise in the level of delinquencies among the Alt-A mortgage loans supporting these transactions,'' along with S&P's expectations for further home price declines, the New York-based unit of McGraw-Hill Cos. said.

The downgrades underscore how loosened lending standards across the mortgage market and borrower fraud are mixing with the first nationwide declines in home prices since the Great Depression and a tightening of credit to sour a wider range of home loans, not just subprime mortgages to borrowers with poor credit. Alt-A loans are sometimes called ``near-prime.''

Prime ``jumbo'' mortgages from recent years packaged into securities also have rising delinquencies that may create losses among some bonds with investment-grade ratings, according to reports yesterday by New York-based securities analysts at Credit Suisse Group and UBS AG. UBS called increases in late payments on adjustable-rate mortgages, or ARMs, from this year ``alarming.''

``It's not just a subprime problem,'' Joshua Rosner, managing director at New York-based research firm Graham Fisher & Co., said in a telephone interview today.

Federal Reserve Rules

The Federal Reserve yesterday proposed new rules on lenders' advertising and payments to mortgage brokers affecting most home loans. The regulator also proposed requirements for higher-rate mortgages that could have ``drastic ramifications for the size of the Alt-A market,'' according to a report today by Barclays Plc analysts led by Ajay Rajadhyaksha in New York.

Alt-A loans were made to borrowers who opted for atypical terms -- such as waived proof of pay, investment-property collateral or low initial payments -- without enough compensating attributes, such as large down payments or cash in the bank.

S&P described the loans as ``first-lien residential mortgages that generally conform to traditional `prime' credit guidelines. However, the loan-to-value ratio, loan documentation, occupancy status, property type, or other factors cause these loans not to qualify under standard underwriting programs for prime jumbo and prime quality conforming loans.''

Total Delinquencies

Since July, late payments on Alt-A loans in bonds issued in 2005 have increased 37.3 percent to 8.62 percent, while delinquencies for such mortgages in 2006 securities rose 62.1 percent to 11.64 percent, S&P said. Moody's Investors Service late last month completed a review of certain Alt-A bonds, downgrading or placing under review a total of $11.7 billion.

Jumbo mortgages are issued in amounts larger than what Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, can buy. The limit for the government-chartered companies for the past two years has been $417,000.

While late payments and defaults on prime jumbo loans remain relatively low, the mortgages are ``deteriorating at almost the same pace as other mortgage products: a down-turn in the housing market has revealed a higher correlation in mortgage credit performance than most anticipated,'' UBS analysts led by Laurie Goodman in New York wrote yesterday.

Borrowers were at least 60 days late on 0.3 percent of fixed-rated prime jumbo mortgages underlying bonds sold this year after 10 months, compared with less than 0.1 percent for loans in 2006 bonds at the same age, UBS said. For prime jumbo ARMs, such delinquencies and defaults totaled about 0.9 percent, compared with about 0.2 percent for the last ``vintage.''

Fewer Loan Types

Sales of U.S. mortgage securities without guarantees from government-linked entities such as Fannie Mae fell to a six-year low last month, according to newsletter Inside MBS & ABS. Companies such as Calabasas, California-based Countrywide, the largest U.S. home lender, have reduced the types of loans they'll grant as a result.

S&P's downgrades included $1.1 billion of so-called option ARMs. Those mortgages allow borrowers to make minimum payments below the interest they owe for a limited time, which leads to larger loan balances and later spikes in monthly bills.

New York-based Moody's on Dec. 14 and Dec. 17 began downgrading option-ARM securities, including ones issued by Seattle-based Washington Mutual Inc. and Zurich-based UBS AG, and Lehman and Bear Stearns, both of New York. Moody's didn't provide a tally of the actions, announced in separate news releases.

Prime Jumbo Loans

Investment-grade bonds backed by even fixed-rate prime jumbo loans from this year are at risk of default because they include more loans with ``layered'' risks, New York-based Credit Suisse analysts Satish Mansukhani, Chandrajit Bhattacharya and Mary Ann Thomas wrote yesterday. Fixed-rate mortgages are considered less risky than ARMs because borrowers' payments can't rise.

The share of fixed-rate prime jumbo home loans whose borrowers took out second mortgages, didn't fully document their incomes and had credit scores below 720 is up, the Credit Suisse report said, increasing from 1.5 percent in 2005 to 2.5 percent in 2006 to 3.9 percent this year.

The median credit, or FICO, score of U.S. consumers is 723, according to Fair Isaac Corp., on a scale of 300 to 850.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.

Last Updated: December 19, 2007 15:28 EST