Moody’s Considers Overhaul of MBS Ratings

Implicitly suggesting that its ratings approach to the ABS/MBS markets may have been flawed, Moody’s Investors Service said on Tuesday that it is considering methods to differentiate its structured finance ratings from the ratings assigned corporate and government bonds.

Moody’s becomes the first major rating agency to float the idea of altering its ratings, as the entire ratings sector has come under fire recently — by regulators, legislators and investors — for acting too late in downgrading many RMBS and related CDO issues.

From the report:

… some market participants have asserted that structured and non-structured securities possess inherently different risk characteristics, such that, for example, Aaa-rated structured securities may not have the same risk characteristics as Aaa-rated corporate securities. Distinguishing the ratings of structured securities from non-structured securities could help raise investor awareness of potential differences in meaning and behavioral attributes between the two categories of securities, providing further information to investors in their investment decision-making processes.

Perhaps the most interesting of the various proposals under consideration would see the introduction of a 21-point rating scale for mortgage-backed and related securities, which would replace the letter-based grading system now in place.

The Wall Street Journal suggests the move may be an attempt to preempt regulatory involvement:

Regulators in Europe and the U.S. may welcome any change by Moody’s. Federal regulators, led by the Securities and Exchange Commission, may even propose in coming months that certain distinctions be made for all structured finance ratings, according to a person familiar with the matter.