More About Sub-Prime Loans

MORTGAGE lending is hardly the raciest business, but it has its moments. “It's a bit like the definition of combat: 59 minutes of boredom followed by a minute of sheer terror,” says Michael Youngblood, an analyst at Friedman, Billings, Ramsey, an investment bank. “And we seem to be going through another one of those minutes now.”

What has set pulses racing is subprime lending—mortgages extended at higher than normal rates to those with weak credit histories. In America, where it is most advanced, this market is under a lot of strain, and so, by extension, is the giant asset-backed securities market that is linked to it. The market for prime mortgages (those extended to higher-quality borrowers) is faring better, though it, too, is showing signs of weakness, exacerbated by cooling house prices. Might these troubles, some wonder, be the canary in the mine, warning of a looming credit crunch as investors, for years free with their money, recoil from risk?

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And this article from Bloomberg...

Dec. 14 (Bloomberg) -- Fitch Ratings said it will likely lower the credit ratings of more than 300 securities backed by the riskiest mortgages next year, as more funds are removed from reserves set aside to protect bondholders.

The company will probably downgrade about 300 so-called sub- prime bonds this year, Grant Bailey, a director at New York-based Fitch, said on a conference call today. That number will increase in 2007 as older bonds suffer from too little funds in so-called over-collateralization accounts, he said.

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