More 'prime' mortgages could sour-Merrill

NEW YORK NEW YORK, Sept 23, Sep 23, 2008 (Reuters via COMTEX) -- MER | Quote | Chart | News | PowerRating -- Nearly 5 percent of newer prime, fixed-rate U.S. mortgages could go sour, Merrill Lynch & Co Inc strategists estimated, reflecting how the housing crisis is affecting even borrowers with the best credit.

Loss rates on loans issued in 2006, the last full calendar year of easing credit standards prior to the downturn, could reach 4.9 percent on fixed-rate mortgages and 8.1 percent on adjustable-rate mortgages (ARMs) if home prices were to fall 10 percent from current levels, according to the strategists.

A 20 percent drop in home prices could lead to loss rates of 6.2 percent on fixed-rate mortgages and 9.9 percent on ARMs made in 2006, the strategists said. Loss rates could be higher on loans made in 2007, and lower for earlier years, they said.

Worsening credit threatens holders of what Merrill said is roughly $8.2 trillion of prime-quality home loans, including many with "triple-A" credit ratings. The rating "may not mean that much" in practice, according to the strategists.

"No one can say for sure where the housing market will be one year from now," Merrill strategists, led by Sophia Lai, wrote. "Credit has become as important as, if not more so, than prepayments in characterizing prime loan portfolios."

On Monday, Deutsche Bank AG analysts projected total market losses of about $544 billion on U.S. mortgage debt, 23 percent higher than their May forecast.

Meanwhile, Oppenheimer & Co analyst Meredith Whitney said Tuesday that U.S. home prices could fall 25 percent from current levels.

Credit problems that were concentrated in subprime mortgages are spreading to other loans. These include "Alt-A" mortgages that often go to borrowers who don't document income or assets, sometimes called "stated income" loans, and prime loans.

Many of the problems have resulted from falling home prices. That has caused the ratios of amounts owed to homes' values -- known as the "loan-to-value" ratio or if there are multiple loans the "combined-loan-to-value" ratio -- to soar. Many borrowers are walking away from their homes.

With loan losses rising, U.S. Treasury Secretary Henry Paulson wants Congress to let the the agency buy $700 billion of troubled assets from lenders and hold them until it can sell them. It is unclear which assets would be eligible.

In July, JPMorgan Chase & Co Chief Executive Jamie Dimon said the bank was prepared for a loss rate that could triple on prime mortgages, after having nearly doubled in the April-to-June period from the prior three months.

(Editing by Jeffrey Benkoe) Keywords: MORTGAGES/RESEARCH

Chuck Mikolajczak cm

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