Tuesday, May 08, 2007

Second-Lien Debt Worries

by Calculated Risk on 5/08/2007 03:36:00 PM

"People are taking out these loans and they realize they can't make payments on them. The first one they're going to default on is the second lien, not the first lien, because many times a servicer will write off the second lien and not foreclose."
Terry G. Osterweil, an analyst at New York-based S&P, May 8, 2007.
From Bloomberg: S&P to Require More Protection on Second-Lien Debt (hat tip: Brian)
S&P's new views would have raised the required amount of "over-collateralization," or investor protection created by having more underlying loans than bonds backed by them, to 8.10 percent, from 5.45 percent in an example the firm used in a report. The amount of debt created with AAA ratings in the issue would have been lowered to 68.30 percent, from 72.25 percent.
This is a significant increase in protection.