Wednesday, November 21, 2007

Fitch Lowers $30 Billion of Mortgage CDOs; S&P Cuts $5 Billion

By Jody Shenn


Nov. 21 (Bloomberg) -- Fitch Ratings downgraded $29.8 billion of collateralized debt obligations linked to residential mortgage bonds, while Standard & Poor's cut ratings on $5 billion of such assets.

Fitch lowered classes from 74 CDOs that hold structured- finance securities, the New York-based firm said in a statement today. S&P reduced ratings on classes from 28 CDOs, the unit of New York-based McGraw-Hill Cos. said in a release.

S&P, Fitch and Moody's Investors Service have been cutting their CDO assessments after an unprecedented round of downgrades on the underlying mortgage bonds as homeowner defaults rise. Fitch said it completed a review of CDOs that hold mortgage bonds it cut on Oct. 29. The company has now lowered $67 billion of CDOs.

Fitch changed its CDO models in August to ``reflect increased probabilities of default, reduced recovery assumptions and increased correlation'' of the performance among different mortgage bonds, a variable in predicting how likely the most- senior classes of CDOs will lose principal.

Since the start of the third quarter, securities firms and banks including Merrill Lynch & Co., Citigroup Inc., and Morgan Stanley have announced at least $20 billion in writedowns on the value of mortgage-bond CDOs they own.

S&P said today it has downgraded $17.1 billion of CDOs backed either by home-mortgage bonds ``that have seen negative credit migration'' or by debt taken out by real-estate investment trusts, according to the statement.

S&P said it's reviewing $24 billion more of such CDOs. The ratings company has also either downgraded or put on review $5.8 billion of CDOs made up of derivative versions of mortgage bonds. CDOs repackage assets such as mortgage bonds or buyout loans into new securities with varying degrees of risk.

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