The recent Moody's rating actions on $33.4 billion of 2006 Subprime U.S. RMBS first-lien collateral came as no surprise to the market that has been expecting another wave downgrades, but the dollar volume affected was shockingly large, many agreed.
"They are just lumping huge amounts of downgrades together now," said a CDO market participant. However the rating agencies appear to be stuck between a rock and a hard place, another source noted, adding that while the rating agencies are proceeding in really big chunks instead of downgrading 100 bonds per week, they may want to avoid having discrepancies. "You would have an arbitrary difference between the ones that you are downgrading this week and the ones that you are going to get to next week," he said. "At least for 2006 we don't have discrepancies in that group but you end up with days like yesterday that post 'Oh-my God' numbers."
One issue that was raised on the call was the difference in expectations for total U.S. RMBS downgrades, as investors expressed that they expected a much higher proportion of the triple-Bs were going to default, about three quarters or more, than Moody's was proposing, the consensus for Moody's seemed to be one half. The rating agency was also bit rosier on home price appreciation, expecting HPA to be 10.5% from peak to trough, something that other market participants felt was a little bit too positive.
The rating agency said it has not yet taken any ratings actions on the CDOs affected by the recent downgrades, but that it would do so over the next few weeks based on the amount of deals affected. 502 CDOs, including 41 from EMEA, have direct exposure to the affected RMBS assets (includes 101 CDOs with tranches that are on review currently).
Indirect exposure through CDO tranches owned by CDOs has not been included in the total numbers, Moody's said, which would make total direct and indirect exposure higher.
The rating agency also said that it will also be reviewing the early 2007 RMBS collateral over the next six weeks, adding that it was hard to speculate on the magnitude of downgrades. Moody's did however rank issuers into tiers based on the amount of delinquencies in their loans. Tier one, the highest performing group, includedAmeriquest, C-Bass, Citicorp Trust Bank, DB Structured Products, Equity One, HSBC Finance Corp., JPMorgan Chase Bank, Lime Financial Services, Nationstar Mortgage, Wells