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Fitch downgrades $16.2 million in AHM bonds

BY DANIEL WAGNER | daniel.wagner@newsday.com

6:52 PM EDT, September 11, 2007

American Home Mortgage insisted until its bankruptcy filing last month that its mortgages were squarely in the relatively safe, "near-prime" category, but a key rating agency says the the mortgages fall in the subprime camp.

Fitch Ratings, one of three firms that provides Wall Street with guidance on the likely performance of bonds and other financial assets, downgraded $16.2 million of American Home's bonds, the agency announced in early September.

The bonds, which were already classified as fairly high-risk, are backed by "scratch and dent" loans AHM originated in 2005. The "scratch and dent" designation is applied to loans that exceed loan-to-value thresholds, do not include documentation of borrowers' income, or fail to perform in the first months after they are disbursed, according to Fitch managing director Vincent Barberio.

Unlike other mortgage-related securities, which enjoy an assumption of industry-standard performance, "scratch and dent" bonds are scrutinized for their actual performance from the day they are bundled and sold as securities.

"Many of these are on the borderline of Alt-A and subprime," Barberio said of the American Home loans. Alt-A loans were granted to borrowers with stronger credit scores than subprime borrowers who did not provide substantial documentation of their assets and salaries, and American Home maintained that most of its business was in this area.

Fitch is in the process of reviewing ratings on all of the 2005 and 2006 transactions it considers to be subprime based on companies' underwriting standards and the credit scores of their borrowers, Barberio said. He said the process has led to downgrades for the majority of the riskiest securities in the area.

Barberio said bonds that have been downgraded trade at lower prices because lower ratings indicate a greater likelihood that the underlying asset will lose value.

Credit-rating agencies including Moody's and Standard & Poors have come under fire from analysts who believe they failed to recognize the risk associated with subprime mortgages in which financial institutions were investing.

In a news release last week, Fitch wrote, "The rating actions are based on changes that Fitch has made to its subprime loss forecasting assumptions. The updated assumptions better capture the deteriorating performance of pools from 2006 and late 2005 with regard to continued poor loan performance and home price weakness."

Barberio said homebuyers and home-equity borrowers who took mortgages in 2006 and late 2005 were particularly vulnerable because in many cases the values of their homes dropped after they borrowed 100 percent or more of their homes' values, which have since declined.

American Home representatives would not comment on the downgrades.