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