A new report from Moody's Investors Service details its streamlined process for monitoring RMBS securitizations.
The rating agency screens its more than 3,000 outstanding RMBS deals, consisting of almost 5,000 pools and about 20,000 tranches, with filters in place to analyze credit level enhancements. If any bonds deviate from expectations, that deal is flagged, and an in-depth analysis is done to see whether a ratings action is needed, according to the report.
"In light of the mortgage securitization volume of the last several years, it was very important to make sure our monitoring processes were streamlined without losing quality to allow us to keep on top of the explosive growth," said Warren Kornfeld, a senior credit officer at Moody's and author of the report.
As part of the process, the rating agency uses a number of different quantitative screens. Each of these screens uses a different method to look at how appropriate the current rating of each tranche is in relation to the ratio of each tranche's credit enhancement percent over an estimated loss percent.
Flagged deals undergo a two-part review. The first part determines if a deal should be put on review for potential upgrade or downgrade. In the second part, analysts decide if any ratings action is necessary.
The review usually consists of the following steps: an evaluation of data and pool composition and historical performance; a quantitative analysis that expands on the one performed in the initial screening process, and an excess spread analysis for those structures where excess spread is available as credit enhancement to cover losses.
"Our process utilizes both a strong analytical framework while also always factoring in the analyst's qualitative assessment," Kornfeld said. Analysts also question servicers, originators and credit enhancers about flagged transactions. These conversations provide a better understanding of recent trends and potential future performance, so the review is not solely based on numbers.