A report by the Senate's Permanent Subcommittee on Investigations said that S&P, Moody's and Fitch Ratings helped trigger the financial crisis when they cut thousands of mortgage securities they rated AAA to junk status. The raters had engaged in a "race to the bottom" to win business, lawmakers said.
Bank of America Corp. is marketing $292.4 million of mortgage bonds that are set to get AAA ratings from S&P, according to people familiar with the matter, who declined to be identified because the terms haven't been set. The transaction was reworked to give $242.7 million of the securities more protection against losses than S&P required, the people said, a sign investors may not have trusted the grades.
That portion of the debt has a projected average life of 2.44 years and may be sold today at a yield of 4 percent, one of the people said. That's about 20 times the rate demanded on two- year Treasuries.
Springleaf Bonds
The underlying mortgages represent 96.6 percent of the current value of the homes, the issuer estimates. Borrowers may have an incentive to walk away from the debt and leave investors with sizable foreclosure losses should the economy slow further and house prices continue to decline.
The securities were created by Springleaf Finance Corp., a lender to borrowers with risky credit that's majority owned by private-equity firm Fortress Investment Group LLC and partly by former parent American International Group Inc., according to the people familiar with the offering.
"We didn't even start to look at the deal," Paul Norris, a senior money manager at Dwight Asset Management Co. in Burlington, Vermont, which manages and advises on about $54 billion of assets, said on Aug. 25. "For the funds we would buy this in, we need a AAA rating and we don't have any confidence S&P would hold this rating for any period of time."
Better Record
Underlying loans for the bonds are on average five years old, according to a document sent to investors. Credit scores of the borrowers, none of whom has missed a payment over the past two years, average 651. The U.S. median is 711, according to Fair Isaac Corp., which creates the formulas behind FICO scores.
The transaction may get investment-grade ratings on 79 percent of the debt, meaning losses on the underlying loans can reach 21 percent before portions rated BBB or better lose principal, according to the term sheet. Springleaf plans to retain all but the most-senior debt, said two of the people.
Of the $12.8 billion of loans made by the firm over the past decade that are still outstanding, 11.5 percent are 60 days or more delinquent, the term sheet shows. That's a better track record than rivals, with the rate on subprime mortgages packaged into bonds averaging almost 37 percent, Bloomberg data show.