Moody's Investors Service placed 3,890 subprime residential mortgage-backed securities (RMBS) with an outstanding balance of $50bn on review for possible downgrade.

The review, prompted by deteriorating performance among subprime mortgages, impacts over 80% of subprime RMBS issued prior to 2005, according to a statement e-mailed to reporters.

Although Moody's said pools backing pre-2005 (seasoned) subprime RMBS paid off "substantially," the remaining loans in the pools have been under pressure as a result of the sharp decline in home values.

Subprime annual delinquency rates increased to an average of about 10% over the past 12 months for subprime pools originated from 2002 to 2004, versus about 7% for those same pools over the prior 12-month period.

"The most important predictor of mortgage default in the past several years has been the degree to which borrowers have negative equity in their homes," the rating-agency said in the statement. "Moody's … expects home prices to fall by about an additional 5-7%, reaching bottom in the coming year, which means that home values will ultimately drop about 17-20% from mid-2004 levels and about 5-10% from mid-2003 levels."

Moody's placed the pre-2005 subprime RMBS on review for downgrade after earlier this week downgrading nearly $39bn of subprime RMBS and expects continued negative performance.

Write to Diana Golobay.