Aug. 13 (Bloomberg) -- Yields on mortgage securities guaranteed by Fannie Mae rose this week to about their highest relative to Treasuries since March amid concern that defaults are spreading to prime and Alt-A mortgages from subprime loans.

Fannie's current-coupon 30-year fixed-rate bonds currently yield 6.06 percent, 213 basis points more than 10-year Treasuries, according to data compiled by Bloomberg. That's 25 basis points from the 22-year high of 238 reached March 6, a week before the Federal Reserve helped bail out Bear Stearns Cos.

The worst housing slump since the Great Depression has blotted out much of the wealth Americans accumulated in their homes, hurting their ability to pay bills and boosting spreads on auto-loan and credit-card backed bonds as well as mortgage securities. Fannie Mae, the largest U.S. mortgage-finance company, last week slashed its dividend 86 percent after posting a worse-than-expected loss and said it will stop buying and guaranteeing Alt-A loans.

``Unfortunately I don't think we're at the bottom yet,'' said Spencer Rascoff, chief financial officer at Seattle-based Zillow.com, in a Bloomberg TV interview. ``There's no question that some parts of the country are paying for past sins.''

Almost a third of U.S. homeowners who bought in the last five years now owe more on their mortgages than the properties are worth, and one-quarter of homes sold in the past year were for a loss, according to Zillow.com, an Internet provider of home valuations.

Credit Access

Consumers are being squeezed by tighter credit and employment markets, with initial jobless claims rising to the highest level in six years last week. Household spending is projected to stall in the last three months of the year, according to a Bloomberg News survey. In turn, that's driving away investors in asset-backed securities, according to JPMorgan Chase & Co. analysts led by Christopher Flanagan in New York.

``The credit crisis is broad, deep, and global, and it is not likely to end soon,'' Richard Bernstein, Merrill Lynch & Co.'s chief investment strategist, wrote in a note to clients. ``The problems are certainly not limited to large U.S. institutions that are overexposed'' to subprime mortgages.

Spreads are widening even after with efforts by Treasury Secretary Henry Paulson to bolster confidence in the real estate market. A more than 80 percent decline in the share prices of Fannie and Freddie this year and higher funding costs prompted Paulson last month to seek authority from Congress to extend unlimited financing to the companies if needed.

Note Sale

Fannie Mae today sold $3.5 billion of three-year benchmark notes at a record-high yield.

The yield over the one-month London interbank offered rate on AAA rated auto-loan backed bonds maturing in three years rose 25 basis points to a 12-month high of 200 in the week ended Aug. 7, according to Bank of America Corp. data. Spreads on similar credit-card securities rose 15 basis points to a three-month high of 110 over Libor. One-month Libor is currently set at 2.47 percent. A basis point is 0.01 percentage point.

Fannie Mae and Freddie Mac, the two largest U.S. mortgage- finance companies, cut their dividends by at least 80 percent after posting losses that were more than three times analysts' estimates. Fannie's decision to stop buying and guaranteeing Alt- A loans may push up defaults on the loans.

Fannie won't accept new Alt-A loans, generally considered between prime and subprime in terms of expected defaults, after Dec. 31, the Washington-based company said. The mortgages, which make up about 11 percent of the $3 trillion financed by Fannie, accounted for almost half of second-quarter credit losses, Chief Financial Officer Stephen Swad said.

California, Florida

Defaults may rise among borrowers in states such as California and Florida facing potentially higher monthly bills on adjustable-rate mortgages or other loans with only a few years of fixed payments because of Fannie's retreat from the Alt-A business, according to Dan Nigro, who helps oversee $5 billion as a bond portfolio manager at New York-based Dynamic Credit Partners.

Spreads are widening because banks and government-sponsored entities like Fannie Mae and Freddie Mac are buying fewer of the securities at they focus on deleveraging their balance sheets and preserving capital, Andrew Harding, chief investment officer of Allegiant Asset Management in Cleveland, said in an interview.

``It's solely balance sheet concerns,'' said Harding, who is ``overweight'' Fannie Mae-backed debt because of the ``very attractive'' spreads. ``You've run out of buyers.''

JPMorgan

JPMorgan yesterday reported a $1.5 billion loss on mortgage- backed securities, including prime, since July, sending the New York-based bank's shares down the most in six years. The second- biggest bank by market value said the consumer provision for credit losses could increase ``substantially'' from a higher level of losses in retail financial services' $47.2 billion prime mortgage loan portfolio.

About 75 percent of U.S. banks surveyed indicated they tightened standards on prime mortgage loans, up from 60 percent in the previous survey, the Federal Reserve said on Aug. 11 in its quarterly Senior Loan Officer Survey.

Losses on prime mortgages, given to customers with the best credit quality, could climb to $300 million a quarter by 2009, according to the bank.

JPMorgan's decision in 2007 to expand in mortgages was ``wrong,'' Chief Executive Officer Jamie Dimon said during a conference call with analysts on July 17. ``Prime looks terrible. We're sorry.''

To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net

Last Updated: August 13, 2008 18:18 EDT