Reeling from rising mortgage delinquencies, Flagstar Bank, FSB saw its long-term deposit rating dropped to ‘Baa3’ Wednesday afternoon by Moody’s Investors Service; the rating level is the agency’s lowest investment-grade rating. Bank financial strength was also lowered to D+ from a previous rating of C-, Moody’s said in a press statement. The downgrade comes as residential mortgages are proving extremely problematic for the Michigan-based bank; Flagstar reported a $30.1 million fourth quarter loss earlier on Wednesday, largely due to fast increases in non-performing loans and borrower delinquences. HW reported that current loan loss reserves are now only roughly one-third the level of current non-performing assets. Moody’s said Flagstar’s ability to generate additional capital will “likely remain under pressure,” and cited the bank’s lack of hedging against MSRs as one concern in this area, as well as the bank’s reliance on comparatively expensive funding sources (CDs, FHLB advances). The rating agency warned that continued losses would likely lead the bank’s rating to fall to junk status. Reuters reported Wednesday afternoon that the bank may suspend its dividend in an effort to preserve capital, as well. Also worth noting is the bank’s increasing concern over consumers walking away from their mortgages, as reported by the Calculated Risk blog. “We haven’t seen anything like this since Texas during the oil bust and people just willing to declare bankruptcy and walk away,” CEO Mark Hammond said in the company’s earnings conference call. “We are seeing a lot of that similar type social phenomenon occurring, especially in California. And that is concerning to us.” Disclosure: The author held no positions in FBC when this story was originally published.