S&P: Bursting of Bubble Shouldn't Sink MBS Market.

New York -- Standard & Poor's expects the housing boom to slow down, but analysts at the rating agency do not expect to see a market crash.

Rather than a bursting bubble, they say that housing prices in the riskiest market may fall victim to a "slow leak" that could hurt the credit quality of subordinate mortgage-backed securities, but would likely leave the rest of most classes of MBS unscathed.

Except in the case of a recession, of course, the residential MBS market may take a much larger hit from the impact of a housing slowdown, according to S&P. Some $1.9 trillion of MBS have been issued since 1993, when mortgage refinancing activity fueled record loan origination activity.

S&P's analysis, which simulated the impact of a housing market decline, indicates that the most likely scenario is that only the lowest-rated classes of MBS would likely suffer downgrades if home prices fall.

Even bonds backed by subprime credit quality loans would fare "reasonably well," S&P said.

The simulation assumed a 20% decline in home prices over the next two years, including a 30% decline on the East and West Coasts, where home prices have risen most dramatically. The simulation assumed a less dramatic 10% decline in home prices in the middle of the country.

Economically, the simulation assumed that unemployment rose slightly and that GDP growth slowed, but not to the point of recession. S&P noted that the simulation explored an unprecedented event: falling home prices despite a reasonably strong and growing economy.