Moody's Investors Service said late yesterday that it will revise its ratings criteria for Alt-A RMBS, reflecting what it called "collateral weaknesses that have surfaced in Alt-A pools securitized in 2006." To put this into perspective: similar revisions in the ratings criteria for subprime securities -- which many critics say came too late in the cycle -- forced massive downgrades of subprime RMBS, driving some pretty significant losses for investors. Per the press release:
These changes, which are effective August 1, 2007, address the poor performance of subprime-like loans, low and no equity loans, and low and no documentation loans present in certain Alt-A transactions. In aggregate, our increase in loss estimates is projected to range from an increase of 10% for stronger Alt-A pools to an increase of more than 100% for weaker Alt-A pools. For example, our loss projection for a strong Alt-A pool may increase from 0.50% to 0.55%, whereas our loss projection for a weak Alt-A pool may increase from 1.5% to 3.00%.
It's interesting to note that Moody's is referring to Alt-A loans as "subprime-like," a characterization many Alt-A lenders including IndyMac Bank have contested. But it appears Moody's has its reasons:
"Actual performance of weaker Alt-A loans has in many cases been comparable to stronger subprime performance, signaling that underwriting standards were likely closer to subprime guidelines," says Moody's Senior Credit Officer, Marjan Riggi. "Absent strong compensating factors, we will model these loans as subprime loans."
Those are pretty strong words, and the fact that Moody's will now look to model at least some Alt-A loans as if they were subprime suggests that a good number of Alt-A downgrades may be just over the horizon.