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Spokane, Washington  Est. May 19, 1883

S&P cuts ratings on $22.02 billion of bonds

Associated Press The Spokesman-Review

NEW YORK – Standard & Poor’s on Friday announced another massive round of downgrades for bonds backed by home loans that the credit-rating agency said are susceptible to default.

S&P cut its rating on $22.02 billion of bonds representing 1,413 classes sold from the fourth quarter of 2005 to the fourth quarter of 2006 and backed by “subprime” mortgages, or home loans issued to people with poor credit histories.

The ratings agency said the latest information suggests people are more likely to miss payments on the home loans acting as collateral for these bonds, leading to losses for bondholders.

Losses on the downgraded bonds have more than doubled since July, S&P said, to 0.69 percent of face value from 0.29 percent of face value. The downgrade represents 4 percent of the subprime mortgage-backed bonds sold during that period.

These bonds were a major breadwinner for investment banks and a source of financing for the housing boom earlier this decade. The ratings agencies, which are under fire for granting strong credit ratings to some classes of mortgage debt, have downgraded thousands of these bonds this year.

Earlier this week, S&P downgraded $23.35 billion in mortgage-backed bonds issued in the first half of this year.

The reason, S&P said, is decaying mortgage credit quality and sinking home values.

Borrowers lose both the incentive and the recourse to repay mortgage debt when their homes lose value. S&P projects housing prices will have tumbled more than 11 percent from their crest by the time the market recovers next year.

Most of the loans backing these bonds are subject to increases in interest-rate payments. Many subprime borrowers took out “adjustable-rate” loans, which start with low payments that reset higher after two years.