MoodyÕ proposes changes to RMBS rating system

Would incorporate global ratings model into U.S. methodology

Moody’s Investors Service is looking to change the way it evaluates and rates residential mortgage-backed securitizations. According to the company, Moody’s plans to utilize a new version of its Moody's Individual Loan Analysis (or MILAN) model as the basis for its analysis of the underlying collateral of RMBS.

Moody’s currently uses the MILAN system in its evaluation of RMBS collateral throughout the rest of the world, but has not been used in the U.S.

“The new model, based on an extensive analysis of performance data and incorporating leading edge statistical methods, supports a robust analysis of US RMBS that is also consistent with Moody's global approach for RMBS,” Moody’s said in a release.

“The proposed changes also bring greater transparency, providing market participants with specific details about the development and application of the credit rating agency's models for loan and pool level default risk and loss given default.”

Moody’s said that the new quantitative model will be the starting point for its analysis of the loan pool and that the new model was developed after an “extensive” analysis of the performance of 800,000 fixed-rate and 600,000 adjustable-rate mortgages issued since 1998.

“The US MILAN model is conceptually similar to the global MILAN model we generally use to assess collateral in RMBS transactions globally," says Moody's Managing Director Navneet Agarwal. "We also believe it sets a new standard for transparency by providing a quantitative tool that market participants can use to estimate Moody's initial calculation of Aaa stress loss for a given mortgage portfolio."

Moody’s said that the proposed changes would apply to the ratings and monitoring of US RMBS backed by first-lien prime mortgage loans issued beginning in 2010.

“For seasoned transactions rated before January 2010 for which significant performance information is available, and which have been exposed to severe declines in home prices and increases in unemployment, Moody's will continue to use its US RMBS Surveillance Methodology, given that performance information is the cornerstone of the analysis,” the company said.

As part of the proposed changes, Moody’s would conduct a thorough analysis of the loan originator, an analysis of the third-party data review and an evaluation of the representations and warranties.

“Moody's believes that the quality of these three components – origination, data and representations and warranties – has to be taken into account as a whole,” Moody’s said. “As an example, a robust third-party review of data can reveal, before a transaction closes, many of the defects that R&Ws are designed to cover but cannot address until later in the life of the deal.”

Moody’s also said that it does not anticipate any changes to existing ratings if and when the new methodology is adopted.

Moody’s is not instituting the changes immediately. Instead, the ratings agency is seeking comment from the public on the proposed changes. Feedback is due through Moody’s website by October 14.

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