Moody's Investors Service has once again updated its surveillance methodology for U.S. residential mortgage-backed securities, which replaces its "FHA-VA US RMBS Surveillance Methodology," published in July 2011.
It changes the minimum number of loans Moody's will require in a FHA-VA loan-backed pool to
The ratings agency maintains the right to not rate securities “whose idiosyncratic credit risks Moody's cannot appropriately assess because of the lack of suitable information.”
The methodology also addresses tail risk when the interest structure of a RMBS changes.
Measures aim to avoid allocating a disproportionately large loss that is based on the current balance of the pool on the underlying, much smaller number of loans remaining in the pool at the end of the transactions’ term. Changes negate a credit enhancement discrepancy. “High in percentage terms may be very low in dollar terms,” analysts note.
For example, if the subordinate bonds receive a portion of prepayment and principal, but cannot benefit from “credit enhancement floors,” analysts note, the most senior bonds are exposed to tail risk and cannot absorb future losses.
Moody’s plans to subject to a stress scenario analysis the ratings of Aaa(sf) through A(sf) securities “in deals with pro-rata pay mechanisms.”
Another rating update applies to structured finance securities in default when tranches have interest shortfalls due to “insufficient funds to meet their interest obligation,” or when tranches do not have interest shortfalls but instead, suffer from “weak reimbursement mechanisms” that may lead to shortfalls.
Highlights include “additional scenarios to test the sensitivity of ratings to projected losses.”
The implementation of the revised methodology, however, “will not immediately affect ratings.
