Moody's Investors Service announced changes to its rating methodology on Alt-A RMBS transactions, including option ARM loans. Separately, Moody's also updated its methodology for rating option ARM loan securitizations.
The Alt-A changes became effective Aug.1. 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 0.50% to 0.55%, as opposed to a weak Alt-A pool, which may increase from 1.50% 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 expected to be the largest contributors to the overall increase in loss estimates for Alt-A pools, Moody's said. These loans are estimated 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 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 by about 10% for all loans that have not yet made a payment. Among additional changes, the rating agency is increasing its loss estimates by approximately 25% for loans to homebuyers with limited homeownership experience, 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 Aug. 10.
Another Option
At the same time, the agency also updated its rating methodology for option ARM loans, which became effective on Aug. 1 as well.
Moody's said it is increasing its loss estimates by up to 20% and Aaa' loss estimates by 10% to 40%. The agency is also refining its analysis of a loan's negative amortization potential by varying its loss estimates on the difference between each loan's fully-indexed interest payment and minimum payment.
Moody's is also adding to its analysis of how a borrower is qualified by varying loss projections based on the difference between a loan's fully indexed payment and the payment at which the borrower was qualified. For Option ARM loans where the borrower's income is not verified, Moody's has also increased its loss projections.
Cash flow assumptions for analyzing a transaction's capital structure have also been refined, the agency said. The full report on the rating changes will be released by Aug. 17.
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