Moody’s to change sub-prime rating system

Moody’s Investors Service will change the way it rates bonds backed by second-lien sub-prime home loans, which have contributed to turmoil in mortgage markets.

The new method will be published by the end of this month, Moody’s said, without providing further details. U.S. investors, ratings companies and lawmakers have begun to reevaluate the way mortgage-bond risk is measured and assessed after lax lending standards led to a rise in the number of bad loans.

“People are going to understand risk differently,” said Mark Adelson, an analyst for Nomura Securities in New York. “Opinions are influenced a lot by the current conditions.”

The number of U.S. mortgages entering foreclosure reached an all-time high last quarter and delinquencies on sub-prime mortgages rose to a four-year high, according to the Washington-based Mortgage Bankers Assn.

Sub-prime bond losses are likely to average 5.5% to 6% over the life of the loans, up from the expected loss rate of 4% to 4.5% that Moody’s had set in 2003, according to a March 7 Moody’s report.

Second-lien mortgages rank behind initial mortgages in priority in the event of foreclosure, making them riskier and more closely tied to home values.

Also Wednesday, H&R; Block Inc., which is trying to sell its Irvine-based Option One sub-prime mortgage unit, disclosed a new credit line with Bank of America Corp. that is half the size of the one it replaced. The remaining credit lines of $14.5 billion are “more than adequate to fund” future lending, a spokesman said.