Moody's To Hike RMBS Loss Severity Assumptions, Extends Expected Trough For Housing Prices

A release out of Moody's today does not seem to jive too well with the prevalent assumption that 90%+ of a 3.5% bounce in GDP being driven by non-recurring events is the greatest way to ramp the market after several down days. The rating agency, always asleep at the wheel, has waited until the proverbial "end of the recession" to say that not only is it extending the cliff for the house price floor by 2 quarters (from 2009 to Q2 2010, expect a comparable extension some time in June 2010), because the last thing they need is to be proven wrong once again, and additionally it is increasing its estimates for loan loss severities for virtually all RMBS classes issued between 2005 and 2007. However, as all those losses will be eaten by the taxpayer and promptly funded by even more dollar devaluing pieces of paper, this release is likely to have no material impact on anything at all.

What is funny is that even Moody's acknowledges the gaping discrepancy between rosy data such as the Case-Shiller and actual cash flows as well as debt servicing, which continue deteriorating: "Even though the Case-Shiller index reported home price gains for three consecutive months starting in June, Moody's believes the overhang of impending foreclosures and the continued rise in unemployment rates will impact home prices negatively in the coming months."

We fully expect the mainstream media will ignore this particular Moody's release.

From Moody's:

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Moody's Investors Service announced today that it will update certain assumptions underlying its loss projections for each of the major U.S. residential mortgage-backed securities (RMBS) sectors in the coming weeks.

Moody's now expects that a trough in home prices will not be reached until the middle of 2010. In addition, based on recent loan loss severities, Moody's will increase its projected lifetime loan losses for pools backing U.S. Jumbo, Alt-A, Option ARM, and Subprime RMBS issued between 2005 and 2008.

The impact of the revisions is expected to be significant for Alt-A, Option ARM, and some Jumbo pools backing securitizations from 2005-2007, with the most pronounced changes expected for the 2005 pools. Performance has deteriorated significantly in the last six to nine months, with loss severities trending higher than Moody's previous expectations. The impact will be less pronounced for Subprime, but still notable for the 2005 pools.

Since the first quarter of 2009, when Moody's last announced revised lifetime loss expectations for the major RMBS sectors, several key economic indicators and performance metrics have worsened relative to expectations. Even though the Case-Shiller index reported home price gains for three consecutive months starting in June, Moody's believes the overhang of impending foreclosures and the continued rise in unemployment rates will impact home prices negatively in the coming months.

Moody's Economy.com (MEDC) now forecasts a third quarter 2010 home price trough. When Moody's last revised RMBS loss projections the trough was projected to occur at the end of 2009. MEDC projects a total peak-to-trough decline of 38% (versus 35%), compounded by muted subsequent home price growth of less than 5% in the year following the trough. Although the magnitude of forecast peak-to-trough decline has only worsened by 3 percentage points, the extended timeline will have an adverse impact on mortgage pools and stressed borrowers will continue to default at high rates.

Adding to borrowers' financial pressure, unemployment is now projected to peak at over 10% in mid-2010 and to remain in the high single digits for two years following.

Borrowers' refinancing options are still slim, and the benefits of loan modifications have yet to be seen due to the 5-month trial period during which modified loans must be reported as delinquent. In addition, modifications of loans owned by the GSEs have outpaced modifications of loans owned by private-label securitization trusts. Moody's will continue to consider the effect of loan modifications in its assessment of RMBS pools, potentially including Alt-A and Option ARM deals, and will continue to monitor success and redefault rates as information becomes available.

Moody's will update specific assumptions and announce the likely implications for each of the major RMBS sectors, in the coming weeks. In addition to the revisions to the home price trough and severity assumptions, other parameters will also be re-assessed, including the degree to which defaults are expected to slow down after the trough is reached.

Moody's will begin taking rating actions as needed this quarter, and will continue through the first quarter of next year.