Moody's Investors Service announced changes to its rating methodology on Alt-A RMBS transactions, including option ARM loans, the rating agency said. Moody's has also separately updated its methodology for rating option ARM loan securitizations.

The Alt-A changes go into effect on August 1, 2007. These alterations range from an increase in loss estimates, which is anywhere from 10% for stronger Alt-A pools, to an increase of more than 100% for weaker Alt-A pools. For example, a strong Alt-A pool may increase from 0.5% to 0.55%, as opposed to a weak Alt-A pool, which may increase from 1.5% to 3.00%, the rating agency explained.

Higher loss estimates for the weakest 5% to 10% of Alt-A loans -- loans with FICOs below 640 and LTVs or CLTVs above 80%, as well as loans with FICOs below 660 and LTVs or CLTVs above 90% -- are projected to be the largest contributor to the overall increase in loss estimates for Alt-A pools, Moody's said. These loans are expected to account for 25% to 50% of the increase in loss estimates.

Moody's also increased its default frequency expectations for high-CLTV loans by up to an additional 25% for loans with little or no equity. This increase will have the most effect on loans with LTVs and CLTVs above 90%, the rating agency said, whose performance has been particularly sensitive to home prices.

Other changes include an increase in risk assumptions, for both low and no documentation loans, by an additional 20% to 25% over previous levels. Moody's is also increasing its loss estimate for all loans that have not yet made a payment by about 10%. Additional changes are the rating agency is increasing its estimates for loans to homebuyers with limited homeownership experience by approximately 25%, increasing its loss estimates for wage earners with stated documentation by roughly 40% and for self-employed borrowers by about 5%. Moody's said it would publish a report on its methodology changes by August 10, 2007.

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