Rating agencies methodology flawed.
Posted on May 5th 2009
The furore over Moody’s mass downgrade of building societies continues and the more I look into this the more I believe that the rating agency has over reacted. At the very least they have not gone deep enough into the asset quality of the building societies mortgage books. The view from Moody’s that house prices could fall by 40% peak to trough is extreme but not impossible and therefore I believe that the financial stress testing based on this was valid and appropriate.
The part that does not make sense is that fairly high level assumptions have been made about loss severity especially in non conforming and commercial loans. The rating agencies methodology is in part based upon assumptions that loans behave in a similar way depending on product type. For example all BTL loans will behave the same despite the many different types of BTL investor. My experience is the exact opposite, having assessed nearly £4 billion of non conforming loans in the last 12 months the only way to accurately forecast losses is to do loan by loan analysis using up to date credit information.
High level assumptions are Okay in certain circumstances but not when the resulting ratings have such a negative impact on the market as a whole..
