Backtracking: Moody’s Downgrades 131 Subprime Securities

Moody’s announced late last week that it had taken negative action on 267 subprime securities, downgrading 131 in total. From the press release (login required):

Ratings on 131 securities were downgraded, of which 111 remain on review for possible further downgrade. An additional 136 securities had their ratings placed on review for possible downgrade. Most of the securities affected had prior ratings of A and below. However, a small portion of the securities had ratings of Aa or Aaa. The Aaa-rated securities had their ratings downgraded by one notch.

Second lien subprime mortgage loans securitized in 2006 are defaulting at a rate materially higher than original expectations. Those loans were originated in an environment of aggressive underwriting and lack protection from home owner equity. The combination of this risk layering with slowing home price appreciation has caused significant loan performance deterioration and is the primary factor in these rating actions. (Emphasis added)

Reuters did a story on this today, which highlighted the quick retreat being beat by rating agencies on many of the 2006 subprime deals:

“It’s pretty rare that you get a triple-A-rated structured product downgraded,” said Mike Kagawa, portfolio manager at Payden & Rygel in Los Angeles.

The move may be a sign of how far Moody’s and its rivals Standard & Poor’s and Fitch Ratings are backtracking in reviewing ratings on bonds backed by subprime loans, analysts said.

Perhaps. It might also just be a sign that the 2006 subprime vintage is the worst ever originated, and the ratings process is finally catching up with that reality.