By Jody Shenn
May 1, 2008 (Update4)
SourceMay 1 (Bloomberg) -- Standard & Poor's will stop rating new bonds composed of U.S. second mortgages, saying it's too hard to assess the debt while the housing slump continues.
The recent deterioration of the loans has been ``unprecedented'' and the ``market segment does not allow for a meaningful analysis,'' New York-based S&P said in a statement.
The ratings company hadn't previously refused to rank broad classes of securities linked to U.S. home loans since the mortgage-market crisis began unfolding two years ago, said Adam Tempkin, a spokesman.
Investors and lawmakers have criticized S&P and Moody's Investors Service for failing to foresee the record surge in U.S. foreclosures and then being slow to downgrade debt, enabling looser lending ahead of the crash and costing bondholders. In response, the companies have announced a series of changes to models and methods.
``In terms of an entire category, an asset class, this is probably unprecedented,'' Tempkin said in a telephone interview, referring to the announcement today.
The change covers bonds backed by closed-end second mortgages or one-time home equity loans, as opposed to equity lines of credit. On April 24, S&P cut $13.1 billion of second- mortgage bonds created last year, or 73 percent of the total.
The unit of McGraw-Hill Cos. said today that it will continue to assess outstanding securities by looking at delinquency and default levels.
Almost All Junk
The downgrades last month left all of the securities with ratings of BBB or lower, compared with 20 percent before the action. BBB is S&P's second-lowest investment grade. About 96 percent dropped to non-investment-grade, or junk, assessments.
``The problem with seconds is it's either good, or it's zero,'' said Brad Golding, a managing director at Christofferson Rob & Co., a New York-based money manager.
Home prices in 20 U.S. metropolitan areas fell in February by the most on record, according to an S&P/Case-Shiller home- price index. Prices dropped 12.7 percent from a year earlier, and have fallen every month since January 2007, the index shows.
Issuance of U.S. second-mortgage or equity-line bonds tumbled 55 percent last year from the highest on record, to $33 billion, according to newsletter Inside MBS & ABS. None were created last quarter.
S&P has refused to rate other types of debt in the past. For instance, it declined to rank Canadian asset-backed commercial paper until this year, citing the ability of banks to escape from providing emergency funding if a ``market disruption'' couldn't be proven by managers. The short-term debt market totaled almost $150 billion before collapsing last August, partly because of the clauses.
Also today, Moody's said it appointed Jonathan Polansky, its group managing director of the asset finance Group, to a new position that will oversee its ongoing assessment of outstanding structured-finance securities.
To contact the reporter on this story: Jody Shenn in New York at
jshenn@bloomberg.net.
Last Updated: May 1, 2008 14:43 EDT