UPDATE 3-Moody's raises loss expectations on subprime loans

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By Neil Shah and Nancy Leinfuss

NEW YORK, July 12 (Reuters) - Moody's Investors Service on Thursday said it is raising its expectations for losses on several types of subprime mortgages, which could lead it to cut its ratings for billions of dollars of bonds backed by these risky loans.

The agency is increasing its loss expectations for newly originated loans by 10 percent, and for other loans to as high as 25 percent, according to Nicolas Weill, Moody's team managing director and chief credit officer.

Moody's and its rivals Standard & Poor's and Fitch Ratings have been criticized for not lowering ratings earlier as delinquencies on loans granted to less creditworthy home buyers have risen.

It raised loss expectations for stated-income loans to as high as 15 percent and to 10 percent for new loan originations, the rating agency said.

Moody's on Tuesday cut ratings of 399 mortgage-backed securities and may cut ratings of another 32, affecting a total of $5.2 billion in debt. For details, see [ID:nN10336254].

"Right now we're experiencing unusual market conditions," said Richard Cantor, team managing director at Moody's, during a conference call to explain Tuesday's ratings cut. The number of subprime mortgage securities downgraded has "no precedent," while the dollar value of these downgrades is less significant, Cantor said.

The credit agency also placed 184 tranches of collateralized debt obligations backed by residential mortgage-backed securities under review for possible downgrade on Wednesday, affecting $5 billion in debt.

Despite Thursday's conference call, questions remain.

"Moody's submitted itself to a gruelling two-hour conference call on its subprime downgrades, but it left a host of questions unanswered," said research firm CreditSights Inc.

"Arguing that loan-loss estimates are more relevant on a deal-by-deal basis, Moody's did not give an average estimate on cumulative subprime loan losses. But, it did not volunteer those loan-loss estimates for individual deals either," said CreditSights.

Cantor said that additional time was needed for subprime loans made in 2006, when underwriting standards were particularly lax, to "season."

Investors on Moody's conference call on Thursday blasted the agency's slow response to a rapidly deteriorating situation in the subprime market.

"You faced criticism after Enron and Worldcom and you had reams and reams of data but you could not have been more wrong," said one frustrated investor on the conference call. "Why do you think you were so off?"

Weill responded: "We looked at all information at our fingertips. As we see information evolving and as we see trends on performance we update the ratings as we see fit."

Another investor questioned the timing of its sudden residential mortgage-backed securities downgrades, which coincided with an earlier ratings action by rival S&P that placed $7.4 billion of subprime RMBS on CreditWatch negative.

"It's hard for us to comment on S&P's rating actions. Our ratings actions are totally different then their set of actions, and they came after months of analyzing trends, originators and comparing to earlier vintages," said Weill.

Cantor also defended Moody's ratings process by differentiating the ratings, which are based on credit risk, from price swings in the market, which can depend on other factors.

"Our ratings address long term views. We do not adjust based on market movements and headlines," the analyst said. (Additional reporting by Walden Siew)