Moody's may downgrade A$83 billion of Australian RMBS

SYDNEY Sun Feb 3, 2008 10:34pm EST

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SYDNEY (Reuters) - Moody's Investors Service may downgrade A$83 billion ($75.5 billion) worth of Australian mortgage-backed debt, in the latest spillover from the U.S. subprime crisis.

Moody's said on Monday it had taken the action after placing U.S. bond insurer PMI Mortgage Insurance Ltd on watch for a possible downgrade following rising loan losses in the United States.

Since PMI has an Australian operation that guarantees residential mortgage-backed securities (RMBS), some 325 tranches from 144 Australian issues were automatically put on watch.

While the action was not seen as an indicator of rising risk in the Australian RMBS market, which has never seen a default, it could scare away already skittish investors.

"It's not good news for new RMBS issues because investors are already suspicious of structured finance ratings including subordinated insured tranches," said David Goode, portfolio manager at Challenger Financial Services Group.

"It's not good for overall RMBS market sentiment and liquidity," he said.

Australia has the world's fourth largest RMBS market, with total outstanding issues of A$173 billion.

Moody's said the review would take up to three months.

Still, market participants emphasized Moody's action did not reflect a weakness in the Australian housing market, which in fact remains strong.

Government data out on Monday showed house prices in Australia's major cities rose by 12.3 percent in 2007, in contrast to the United States where prices are falling at record rates.

According to Standard & Poor's latest statistics, the real level of loans in arrears in Australia actually fell marginally in October. Loans with arrears greater than 30 days were a tiny 1.04 percent in October, according to S&P.

Unlike in the UK or the U.S., Australian prime RMBS are insured by mortgage insurers, giving investors greater security but also a lower return.

PMI is one of two major mortgage insurers in Australia. Genworth Financial Mortgage Insurance, whose Aa2 ratings were affirmed by Moody's last week, is the other.

Moody's said there was a very small likelihood that PMI would default on its debt and any ratings downgrade did not necessarily mean investors would lose money.

"A number of things would have to go wrong for Australian RMBS note holders to loose their investments," said Henry Charpentier, managing director of structured finance at Moody's.

"We are talking about a distant default."

The chain of events that would lead to a loss for RMBS investors would need to start with a much higher number of mortgage defaults in the securitized pool.

Moody's said that depending on the proportion of loans insured by PMI, their seasoning (time since issue) and other structural features, a number of these transactions may see their ratings confirmed on the conclusion of the review process.

(Editing by Jonathan Standing)

(cecile.lefort@reuters.com; +612-9373-1234; Reuters Messaging: cecile.lefort.reuters.com@reuters.net))

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