""Moody's Investors Service"":http://www.moodys.com has outlined several credit concerns that have led the agency to decline to give its highest ratings to resecuritizations of U.S. residential mortgage-backed securities (RMBS). Moody's says such denials are becoming more and more common.
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In a new report, the New York-based ratings agency identifies its primary concerns to include the volatility of potential losses in today's mortgage environment, ambiguities in legal documents, uncertainties resulting from foreclosure irregularities, and a lack of strong protections against bankruptcy risk.
Moody's explained that resecuritizations bifurcate the risk embedded in low-rated RMBS bonds by creating two new bonds, directing cash first to the resecuritization senior bond, and allocating losses to the resecuritization junior bond.
The agency says it rated only 38 RMBS resecuritizations in 2009 and three in 2010, representing less than 1 percent of the approximately 5,500 RMBS resecuritizations that have been issued over the last two years.
""When properly structured, the resecuritization senior bond could achieve a rating higher than the original
[COLUMN_BREAK]underlying RMBS bond, however the majority of resecuritizations we've seen to date have had significant credit concerns,"" said Linda Stesney, a Moody's managing director and co-author of the report. ""We believe ratings on properly structured transactions can provide investors with a useful indication of the credit risk of their investments.""
Concerns over loss volatility have either disqualified many transactions from Moody's highest rating levels or rendered them uneconomical for issuers.
""Resecuritizations are more sensitive to certain payment scenarios than the underlying bonds,"" Stesney explained. ""This sensitivity, together with the complexity of resecuritizations, results in a higher level of loss volatility.""
In other cases Moody's did not rate resecuritizations because unresolved ambiguities in the legal documents of the underlying deals could affect cash flows to the resecuritization bonds. More recently, Moody's has been unwilling to assign its highest ratings to resecuritizations because of foreclosure irregularities extending liquidation timelines and adding to costs.
""Delays in foreclosure alter the amount and timing of payments to the underlying bonds, resulting in considerable uncertainty around the final pay down of the resecuritization,"" said Stesney.
Moody's also believes the added risk of bankruptcy in some RMBS resecuritizations is inconsistent with its highest ratings.
""While the underlying bonds had strong protections against bankruptcy risk,"" Stesney said, ""some of the resecuritizations did not have the same type or degree of protection against the bankruptcy risk of their own sponsors.""