Investors should sell prime jumbo mortgage bonds trading at the highest prices, because they may lose their top ratings as home prices fall, a report from two Amherst Securities Group LP analysts said.
Defaults on jumbo loans underlying bonds from 2005 and earlier are growing and will lead to ratings cuts, according to a report issued last week by the two analysts, Laurie Goodman and Roger Ashworth.
"Regulated institutions have a harder time buying ratings-unstable assets, as their risk-based capital requirements will rise when the downgrades occur," the New York analysts wrote. "Thus the buyer base for ratings-unstable securities consists primarily of money managers and hedge funds."
Following a rally over the past two months, some of the best types of prime jumbo securities are trading at "mid-to-high 90" cents on the dollar to yield 6% to 6.5%, the report said. That compares with yields of about 15% on alternative-A mortgage bonds with initial triple-A ratings.
Home loan bonds fetching the highest prices have "minimal delinquencies" and are tied to loans made before a record U.S. housing boom turned into the biggest slump since the Great Depression, the analysts wrote.
Ms. Goodman is the former head of fixed-income research at UBS Securities LLC, whose team received the top ranking for nonagency mortgage debt in a 2008 poll by Institutional Investor magazine.