Home equity loan downgrades could increase by three to four times this year compared with the second half of 2006, Lehman Brothers said last week in a report. Such an increase would mean as many as 1,500 bonds could be at risk for a downgrade, given a 0% to 5% national rate of home price appreciation.

The activity is widely anticipated to stretch HEL spreads further, both in cash and synthetic markets. Rising delinquencies could be enough to abate what has been an insatiable hunger by CDOs for the securities because of mark-to-market and structural issues - a trend that is likely to give way to either new or lesser-utilized asset classes for the sectors to feed on, such as trust-preferred securities or commercial real estate.

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