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Morningstar Credit Ratings released its methodology for rating mortgage-backed securities Tuesday.
The agency previously focused on commercial real estate. It announced in October it would push into the RMBS space. Each rating assigned will be reviewed monthly to account for any market changes.
An economic outlook committee will convene periodically to review results of its private models used to forecast how the bonds will perform under expected and stressed conditions, including home prices, unemployment, interest rates and lending conditions, according to the methodology.
Analysts will provide specific loss forecasts for each tranche.
Morningstar will also look at representation and warranty language that govern when an investor can force the originator to buyback faulty loans tied into the security. The agency relied on its own counsel and proposals from the American Securitization Forum in 2009.
Morningstar, along with other agencies such as Kroll and DBRS are looking to take some market share from the big three Standard & Poor's, Moody's Credit Ratings and Fitch Ratings. The big three still face litigation and other challenges to high ratings given to many flawed securities during the housing boom.
"We are excited about the opportunity to provide structured finance investors with timely, unbiased, and transparent NRSRO credit ratings on both new issue and seasoned RMBS transactions," Morningstar said in a statement. "In response to growing investor demand for greater rating agency transparency, we are providing investors with the economic scenarios that drive specific rating categories."
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