Jumbo mortgage-backed securities that are issued in smaller classes are more vulnerable to losses, according to a report by Moody's Investors Service.

Because its ratings take into account both the likelihood of default and the severity of losses, Moody's said, these smaller classes of securities tend to get lower ratings.

"If you have two classes of different sizes with the same amount of credit support, they will not necessarily be rated the same because of the impact of severity of loss," said Andrew Lipton, vice president and senior credit officer in the Moody's residential mortgage finance group.

To secure an AAA rating for large senior classes of securities, issuers often use smaller classes of subordinate or mezzanine securities to insulate the senior class from losses, Moody's said.

Fitch IBCA said it has upgraded the criteria it uses to analyze credit risk in securities backed by pools of A-quality residential mortgages.

The changes include a new method of calculating the frequency of foreclosure that fully integrates a borrower's credit profile with loan characteristics, said Kenneth E. Higgins, senior director at Fitch IBCA. The model now looks at loan-to-value ratios; Fair, Isaac & Co. or other credit scores; the product type (fixed- or adjustable-rate mortgage); and the purpose of the loan (to purchase or refinance).

Another new feature is an indicator that helps identify regional increases or declines in home prices. The model also incorporates rating multiples to compare default rates by region.

The company said it uses the Southern California real estate downturn of the 1990s as a proxy for a national AA scenario because of the dramatic decline in that market and the large supply of nonconforming A-quality mortgage performance data.

Fitch IBCA's model is used by companies planning to issue mortgage- backed securities as well as by investors who use the results of the model to tailor investment decisions, Mr. Higgins said.

Interest rates on 30-year home mortgages, 30-year Treasuries, federal funds, and municipal bonds are expected to fall in 1999, the Bond Market Association's economic advisory committee said.

The monthly average rate of 30-year mortgages is expected to drop to 6.4%, from 6.7%, the committee said in its semiannual forecast.

Rates for 30-year Treasuries are expected to move to 4.75% by mid- December 1999, from 5.1%. The association predicted the federal funds rate would dip to 4.40% from 4.75% and municipal bond rates would fall to 4.7% from the current monthly average of 5%.

Declining mortgage rates are expected to spur an increase in 1999 housing starts to 1.6 million, from 1.5 million, the association said. New- home sales are expected to decline next year to 800,000, from a projected 870,000 for 1998. Sales of existing homes are expected to drop to 4.5 million next year, from the 4.8 million projected for 1998.

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