Moody's to cut ABS CDOs after revising methodology

NEW YORK, Dec 11 (Reuters) - Moody's Investors Service on Thursday said it has changed some assumptions it makes to rate structured deals backed by mortgage and other asset-backed securities, which is likely to result in large downgrades of many of the deals.

Ratings agencies including Moody's have come under fire for awarding top ratings to collateralized debt obligations backed by risky residential mortgages and other assets, which have plunged in value as home prices dropped and borrowers defaulted on mortgages.

The CDOs, which repackage and resell mortgages for higher returns, were a primary factor in stoking demand for mortgage loans during the housing bubble.

Moody's said it has changed its rating assumptions relating to the correlation of the assets in the deals, their default probability and their recovery value.

The changes will result in a large number of the deals being cut by around three notches, and they will remain on review for further downgrade, Moody's said in a statement.

"These changes are in response to weak performance of certain structured finance asset classes over the past two years, the limited near-term opportunities for consumers and corporates to refinance debt, and the increasingly negative credit outlook for the global economy," Moody's said. (Reporting by Karen Brettell; Editing by James Dalgleish)