Moody's Investors Service said it expects that nearly all already delinquent loans will eventually default because of unprecedented market conditions.
In its latest report Moody's attributes the higher loss expectations to 'the continued deterioration in home prices, rising loss severities on liquidated loans, persistent elevated default rates, and progressively diminishing prepayment rates throughout the sector.'
Loss expectations for newly originated loans will increase 10% while loss expectations on other loans could rise 25%, said Nicolas Weill, Moody's team managing director and chief credit officer.
Currently, 42% outstanding 2006 vintage subprime loans are at least 60 days delinquent, in foreclosure, or held for sale, Moody's said. So a third of borrowers, that is 19% of today's outstanding loan, could be in default mode by the end of 2009.
'Despite anticipating modest recovery in the housing environment in the next few years, Moody's expects subprime borrowers will find limited refinancing opportunities due to negative equity and lack of available credit,' the report said.
Loss severities have also worsened in the last few months, rising to 63%, according to the report. Moody's anticipates loss severities to rise to around 70% based on an expected further decline in home values.
'Despite the anticipated recovery in the housing market subprime severities are likely to remain elevated over time,' Moody's said.
'Right now we're experiencing unusual market conditions. The number of subprime mortgage securities downgraded has no precedent while the dollar value of these downgrades is less significant,' explained Richard Cantor, team managing director at Moody's.
