The performance of the lowest grade of Alt-A loans made last year closely resembles the performance of 2006 vintage subprime loans, according to new ratings agency report. As a result, Alt-A loss assumptions have been elevated.
In response to a deterioration in the performance of Alt-A mortgages securitized last year, Moody's Investors Service announced it has changed its ratings methodology on those loans. The changes will be implemented tomorrow.
The ratings agency said it will increase loss estimates by 10 percent for stronger Alt-A pools and as much as 100 percent for weaker pools. Default frequency expectations for high combined loan-to-value loans will be pushed up 25 percent.
Loans with FICO scores below 640 and loan-to-values above 80 percent, as well as mortgages with scores under 660 and LTVs above 90 percent, are responsible for between one-quarter and one-half of the increase in estimated losses, according to Moody's.
"Actual performance of weaker Alt-A loans has in many cases been comparable to stronger subprime performance, signaling that underwriting standards were likely closer to subprime guidelines," Moody's Senior Credit Officer Marjan Riggi said in the statement. "Absent strong compensating factors, we will model these loans as subprime loans."
Loss estimates on no-documentation and low-documentation loans -- which have been observed to perform similarly poorly -- will be bumped by as much as one-quarter, the announcement said.
As with recent subprime ratings process adjustments, Moody's indicated it would factor in early payments, prior home ownership experience and whether a stated-income loan was to a wage earner.
The New York-based agency also announced it would factor in potential negative amortization and qualifying payments versus fully-indexed payments on option adjustable-rate mortgages.
"The updated Option ARM methodology is expected to increase our loss estimates by up to 20 percent and Aaa loss estimates by 10 percent to 40 percent," the press release said.
Moody's warning comes on the heals of a disclosure today by American Home Mortgage Investment Corp. -- a major Alt-A player -- that it has stopped funding loans and may liquidate.