Next shoe to drop Alt-A

By Jody Shenn

Oct. 15 (Bloomberg) -- Standard & Poor's said it may downgrade $280.1 billion of Alt-A mortgage securities, the most that the ratings company has identified in a single announcement for bonds backed by the loans.

The debt may be cut in part because S&P has boosted estimates for losses on each foreclosure on Alt-A loans with at least five years of fixed rates to 40 percent, from 35 percent, the New York-based company said today in a statement.

Securities downgrades may boost the capital needs of holders such as banks and insurers, and force some investors to sell debt. Rating companies have been stepping up downgrades on mortgage bonds backed by loans other than subprime or second mortgages amid tumbling home prices and soaring late payments.

``There has been a persistent rise in the level of delinquencies among the Alt-A mortgage loans supporting these transactions,'' S&P analysts Scott Davey and Ernestine Warner said in the statement.

Alt-A home loans, considered between prime and subprime in credit quality, were made to borrowers who wanted atypical terms such as proof-of-income waivers, delayed principal repayment or investment-property collateral, without having to offer sufficient compensating attributes.

Foreclosures, Distressed Sales

Loans at least 90 days late among those underlying the securities that S&P downgraded today totaled 13.1 percent of the balances as of September, up 27.6 percent from June, S&P said. Loss severities will be higher because property prices will probably fall further amid ``continued foreclosures, distressed sales, an increase in carrying costs for properties in inventory, expenses associated with foreclosures, and further declines in home sales,'' the firm said.

Ratings companies downgraded about $118 billion of prime- jumbo and Alt-A bonds last month, including $90 billion of top- rated debt, according to an Oct. 3 report from JPMorgan Chase & Co. That was down from a record of $200 billion in August, the report said.

On Oct. 6, Moody's Investors Service put $110 billion of prime-jumbo mortgage securities under review for downgrades. Jumbo loans are those larger than government-chartered Fannie Mae and Freddie Mac can buy or guarantee, or $417,000 for single- family loans in 2006 and 2007