Moody's Refines Option ARM Analysis

Moody's has also refined its approach to analyzing securitizations of payment-option adjustable-rate mortgages.The methodology revisions, stemming from the weaker housing and mortgage markets, also refine the rating agency's credit risk analysis of different option ARM products, Moody's said. "The updated option ARM methodology is expected to increase our loss estimates by up to 20% and Aaa loss estimates by 10% to 40%," Moody's said. The agency said the updated methodology refines its analysis of a loan's negative amortization potential by varying loss estimates based on the difference between a loan's fully indexed interest payment and its minimum payment. In addition, Moody's is enhancing its analysis of how a borrower was 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. Moody's has also increased loss projections for option ARMs in cases where a borrower's income was not verified.