S&P: Credit Crisis Halfway Over at Best

Wednesday, August 13, 2008 2:26 PM

NEW YORK -- A year-long credit crisis may be only halfway over and defaults of prime mortgages and problems at U.S. bond insurers are expected to exert a drag on future bank earnings, Standard & Poor's said Wednesday.

Defaults and late payments for mortgages known as Alt-A securities and prime mortgages are rising, and problems at bond insurers — known as monolines because they traditionally provided services to only one industry — may hit bank earnings in subsequent quarters, S&P credit analyst Tanya Azarchs said.

As the value of mortgage securities continues to fall, bond insurers' exposure to the bonds may cause a ripple effect that forces more Wall Street banks to incur losses on the insured securities.

"We believe there could be further monoline write-downs that banks will have to take," Azarchs said on a conference call. "We're expecting more fairly significant problems to come."

The bond insurers became entangled in the credit crisis when they grew beyond insuring municipal bonds and expanded into complex structured bonds.

Financial institutions such as JPMorgan Chase & Co have now suffered more than $400 billion in paper and realized losses due to the meltdown in U.S. mortgage securities.

The International Monetary Fund estimates the figure may grow to $1 trillion, while New York University economist Nouriel Roubini estimates the figure may even reach $2 trillion.

Earlier this week, JPMorgan reported $1.5 billion of losses so far this quarter on mortgage-linked assets.


Azarchs said the market is roughly halfway through a year-long crisis, "at best," she said. "Obviously, these are very unprecedented times."

PRIME LOAN DELINQUENCIES RISE

Azarchs noted that even prime loans are deteriorating at a rapid clip this year.

"This is only escalating and it's not getting any better," she said.

Delinquencies of prime mortgages originated in 2007 are outpacing those made in 2006, according to Federal Deposit Insurance Corp data sent to Reuters in an e-mail.

Some 0.91 percent of prime mortgages from 2007 were seriously delinquent after 12 months, meaning they were in foreclosure or at least 90 days past due. That figure is nearly triple the levels seen in 2006, when 0.33 percent of prime mortgages were delinquent after 12 months, the FDIC data showed.

Analyst Scott Sprinzen also said write-downs from collateralized debt obligations, or CDOs, are becoming less of a threat, but a greater concern may come from bond insurers and Alt-A securities, he said.

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