[First published on December 3, 11:15 London time. Updated on December 4 to include comments from market participants]
The proposed framework is largely based on the rating agency’s Moody’s Individual Loan Analysis (Milan) model.
Moody’s noted that there is a lack of historical data when it comes to the Chinese property sector. This is because it has a relatively young housing market compared to the rest of the world, having only started around three decades ago when it allowed private home ownership.
As a result, many of the settings proposed for China are typically applied to similar markets with data limitations, although Moody’s is also tweaking several conditions to take into account some distinctive characteristics of the Chinese mortgage market.
One of the key changes it is proposing to make include the weightage allocated to house price stress rate (HPSR), which quantifies the volatility in property prices.
A HPSR fixed factor of 40% and a HPSR variable factor of 50% are applied for new securitization markets, which Moody’s is planning to reduce to 35% and 40%, respectively, for Chinese RMBS.
The changes are made due to differences between China and other markets in terms of their macroeconomics characteristics, property and mortgage markets, as well as regional differences within the country itself.
Other criteria that are different for Chinese RMBS include adjustments to debt to income (DTI) ratios, default probability and having a wider range of property values compared to new securitization markets.
The consultation runs until January 15, 2016 and can be found here.
A Hong Kong-based structured finance banker reckons the proposed rating framework from Moody’s is a sure sign that an internationally rated RMBS from China is just around the corner.
Until now, the only Chinese ABS that contains international ratings are auto loan securitization from the likes of BMW, Ford or VW.
When asked about the possibility of internationally rated RMBS deals from China, Jerome Cheng, Moody’s senior vice-president for the structured finance group, said: “It is natural for Chinese deals to have international ratings if they attract interests from international investors. Auto loan ABS is an example of this internationally driven demand, which may expand to other asset classes as well.”