Fitch May Lower Ratings on 15% of U.S. Prime Mortgage Securities

Fitch Ratings said that it may lower about 15 percent of its credit grades on securities backed by U.S. prime mortgages, typically those too large for government- tied programs when they were issued.

More than 90 percent of the bonds under review were created in 2005 or earlier, the New York-based ratings firm said today in a statement. In a report earlier today, Fitch said that such debt is being made riskier by “adverse selection” after better-quality borrowers refinanced their portion of the underlying loans. The securities have “historically performed well,” with 93 percent of the roughly $650 billion issued already repaid, Fitch said.

Downgraded senior-ranked securities are “still generally expected to retain investment-grade ratings and thus are expected to recover full principal,” Fitch said. Ratings cuts are likely to be one to two categories, it said.

So-called jumbo mortgages issued in 2005 were smaller than $359,650 for single-family properties, with the limits lower in earlier years. Ratings companies such as Fitch generally don’t assess the creditworthiness of debt in the larger market for government-backed mortgage bonds.

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

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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