Moody’s alters its subprime rating model By Saskia Scholtes in New York
Published: September 25 2007 03:09 | Last updated: September 25 2007 03:09
Rating agency Moody’s is changing the way it rates complex debt products backed by US subprime mortgage bonds to reflect mounting losses in the stricken market.
The changes come as the major rating agencies have come under fire for granting high ratings to such complex mortgage securitisations, amid signs of looser lending standards and slowing house price appreciation.
These so-called collateralised debt obligations have suffered precipitous drops in market value and downgrades to several notches below their initial ratings as late payments and defaults on the underlying mortgages have exceeded the agencies’ initial expectations.
Moody’s has responded by making its rating model more conservative to reflect these higher losses. The rating agency has also broadened its definition of subprime mortgages to include other less risky mortgages previously classified by the rating agency as “midprime” – meaning that such mortgages will be subject to higher loss expectations than previously.
The changes are the latest in a string of updates to CDO rating models by Moody’s and rivals Standard & Poor’s and Fitch, as subprime mortgage losses have continued to accelerate for home loans originated in 2005 and 2006.
Moody’s said the pattern of deterioration was evident in all three major mortgage markets – subprime, Alt-A and prime – though late payments and defaults are considerably lower on slightly less risky Alt-A mortgages than on subprime, and even lower on prime.
The agency said late payment and default rates had also been progressively higher for securitisations originated in consecutive quarters. It said this was “an indication losses on the most recent securitisations are likely to continue growing in the near-term compared with earlier securitisations”.
Defaults for subprime home loans that originated in the last quarter of 2006, at 3.54 per cent, were nearly four times the average between the first quarter of 2002 and the second quarter of 2005, Moody’s said. Defaults on Alt-A mortgages increased by a factor of five, although they were still less than a third of the subprime default rate.
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