In a new Rating Methodology report, Moody's Investors Service explains how it revises its default assumptions to provide an advance warning signal on the performance of asset-backed securities (ABS) and residential mortgage-backed securities (RMBS) transactions in Europe, the Middle East and Africa (EMEA).
"Our methodology combines historical performance, recent changes in trend and sector outlooks to determine a projection for future defaults that is forward-looking and reactive," says Michel Savoye, a Moody's Analyst and co-author of the report. "This is considered along with other qualitative considerations in Moody's surveillance committees, without replacing the standard committee process, in order to adjust assumptions and ultimately ratings of standard ABS or RMBS transactions in a timely manner."
The approach to derive a revised expected default assumption uses the original assumtion, the historical delinquency, default and redemption rates over the life of a transaction to produce both:
- A short-term projection, to predict the defaults deriving from the non-performing part (i.e. the delinquent part) of the portfolio in the near future. This is carried out through a roll-rate analysis applied to the different delinquency buckets of the transaction, and
- A long-term projection, to predict the defaults coming from the portfolio over the remaining life of the transaction. This is carried out by extrapolating the future amortisation of the portfolio from recent redemption data and forecasting future default frequency rates from recent default data.
"The sum of the short-term and long-term projections is the revised expected default assumption for the transaction," adds Giacomo Bonetti, co-author of the report. "Moody's can then apply specific stresses to account for Moody's sector outlook on the asset class of the transaction or the country where the underlying assets are located."
The report, entitled, "Revising Default/Loss Assumptions Over the Life of an ABS/RMBS Transaction" uses illustrative examples to explain the calculations that are made in order to arrive at revised default and loss assumptions.
- Ends -
For more information, please contact:
Marie-Jeanne Kerschkamp
Managing Director
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Michel Savoye
Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
© Press Release 2008
