Moody's correction leads to upgrading 180 tranches of RMBS
Moody's Investors Service corrected a metric that gauges the credit enhancement of excess support for residential mortgage-backed securities that resulted in the upgrade of 180 tranches of debt worth about $9.7 billion. The ratings agency said an input error in the cash-flow model for the 72 transactions led to inappropriate amounts "of benefit to excess spread as credit enhancement." Excess spread is the extra income generated from bonds, such as RMBS, and is used to top up reserve accounts and pay employees who service the platform. Analysts said the collateral backing the deals includes mostly first-lien, fixed- and adjustable-rate subprime residential mortgages. The RMBS were issued between 2005 and 2007 by JPMorgan Mortgage Acquisition Trust, Merrill Lynch Mortgage Investors Trust, Morgan Stanley ABS Capital Trust and Popular ABS Mortgage Pass-Trough Trust. One tranche, issued by Morgan Stanley IXIS Real Estate Capital Trust 2006-2, was downgraded as a result of the adjustment and a deterioration in performance. Moody's has been adjusting ratings on billions of dollars of various types of RMBS this year, reflecting changes in criteria, as well as the deterioration in the performance of the underlying mortgage pools backing the transactions. Analysts continue to see "an increasing potential for a double-dip recession, which could cause a further 20% decline in home prices," putting further stress on the housing market and mortgage-backed securities. Moody's cites the uncertainty in the current macroeconomic environment with high unemployment and persistent weakness in housing for its outlook. Analysts expect at least a 5% to 8% drop in home prices with stabilization to the market coming early next year. Earlier this week, the Standard & Poor's/Case Shiller 20-city composite index showed home prices fell 1.3% in October from September with declines in all 20 metropolitan markets. Prices are down 0.8% from a year ago. Write to Jason Philyaw.