Some mortgage investors got an unexpected refresher course on the risks of subprime debt when they received notice of $1 billion of previously undisclosed losses, the Wall Street Journal reported today. The news came with May's monthly statements on dozens of bonds backed by 75,743 home loans made before the financial crisis to borrowers with subprime credit. Many of the losses on the $15.2 billion of loans outstanding likely weren't reported to bondholders for a year or longer. Behind the sudden losses is a standoff between Wells Fargo & Co., the nation's largest mortgage lender, and Ocwen Financial Corp., the largest servicer of subprime loans, over the treatment of loans subject to a type of modification in which the borrower's repayment schedule has been extended to reduce the monthly payment. The losses themselves likely aren't backbreaking for investors in the $1 trillion market for nongovernment mortgage bonds. Like other riskier assets such as high-yield corporate debt, subprime mortgages have rallied since early 2012 as the economic recovery has gained steam and U.S. home prices have begun rising after a sustained decline.
