Rating agency Moody’s announced on Wednesday that it was updating its risk models for 2006 residential mortgage backed securities deals (RMBS).
Moody’s changes reflect near identical changes made by Standard & Poor’s mid-January, which resulted in massive RMBS downgrades yesterday.
Moody’s too, then, can be expected to be downgrading a lot of RMBS and CDOs in the not too distant future. S&P’s action yesterday involved $500bn of structured paper.
The adjusted metric behind those downgrades is the cumulative loss measure. S&P bumped its 2006 cumulative loss average from 14 per cent to 19 per cent. Moody’s has now moved its average from 14 per cent to 18 per cent.
But Moody’s have also given a quarter-by-quarter average for 2006 vintages of RMBS. And significantly, it has also given a range of possible cumulative loss figures – explaining that some RMBS deals are significantly riskier than others:
(1) average losses for the 2006 annual vintage would fall within the 12-24% range;
(2) average losses for the Q1 vintage of 2006 would fall within the 9-13% range;
(3) average losses for each of the subsequent quarters would be progressively higher, with projected losses on the Q4 vintage ranging from 14-35%.