More challenges are hitting bond investors who own securities backed by risky mortgages.
Over the past two weeks, Moody's Investors Service cut credit ratings on more than 30 bonds that were issued in 2006 and backed by pools of "subprime" mortgages, home loans made to consumers with troubled or sketchy credit histories. The downgrades came as more borrowers defaulted on their mortgages and caused losses to spike among the pools.
More than half the bonds that were downgraded were originally rated "investment grade" but were cut to "junk" status, because they now are viewed as much more likely to lose money. A few bonds with weak ratings already have been eroded by losses, which means investors in those bonds probably won't be repaid.
"It's unusual to see downgrades in subprime deals so soon after they were issued," said Jay Guo, a director of asset-backed securities research at Credit Suisse Group. "This is not a normal phenomenon and is a cause of concern."
So long as there is liquidity, everything is fine. And that's where this news comes in. With rising defaults, sub-prime liquidity is starting to dry-up. That means fewer buyers of homes, which in turn means the high levels of homes on the market will remain on the market for a longer time.
If this type of news continues, it will eventually ripple through the economy in the form of lower GDP growth as builders continue to stop building homes because of high inventory levels caused by lower demand. What makes this most troubling is the time it takes for this to happen. The real estate market takes time to react to and influence the economy.
