RMBS resecuritizations not earning ratings from Moody's
[Update 1: to clarify for all investment grade ratings not just triple-A.] Resecuritizations within residential mortgage-backed securities can help investors, but until some credit concerns are addressed by issuers the bonds won't be garnering ratings from Moody's Investors Service. Analysts said less than 1% of about 5,500 rated RMBS resecuritizations in the past two years warranted receiving investment-grade ratings. In 2009, Moody's rated 38 of these deals. Last year, just three of these deals came to market with an investment-grade rating from the agency. Moody's said the volatility of potential losses weighs heavily on the credits and has prompted analysts to abstain from assigning many transactions a rating. "Resecuritizations are more sensitive to certain payment scenarios than the underlying bonds," according to Linda Stesney, managing director at Moody's. "This sensitivity, together with the complexity of resecuritizations, results in a higher level of loss volatility." This volatility has disqualified many deals from being rated, "rendering them uneconomical" for issuers, who subsequently decline ratings from the agency, according to Moody's. Ambiguities in legal documents for the underlying bonds within the RMBS, foreclosure irregularities and bankruptcy risk also lead Moody's to withhold assigning a rating to many of these deals. Still, analysts said resecuritizations can result in a strong rating for the bonds, when the deal is structured properly because they "bifurcate the risk embedded in low-rated bonds." "When properly structured, the resecuritization senior bond could achieve a rating higher than the original underlying RMBS bond, however the majority of resecuritizations we've seen to date have had significant credit concerns," Stesney said. "We believe ratings on properly structured transactions can provide investors with a useful indication of the credit risk of their investments." Write to Jason Philyaw.