Moody’s weighs new rating system

Moody’s Investors Service is considering a new rating system for mortgage-backed bonds and other so-called structured-finance securities that would use numbers instead of traditional letter grades.

Some investors and lawmakers say Moody’s and other rating firms lost credibility early last year by grading sub-prime securities too highly and then failing to account quickly enough for a surge in mortgage defaults that would later roil credit markets.

In a letter Monday, the rating firm asked investors for comments on five options it is reviewing to improve ratings, including a numerical scale and a designation of “.sf” to differentiate a structured finance ranking from a grade indicating the creditworthiness of a corporate or government borrower.

“There is concern that some people are making decisions based solely on ratings and they are assuming that those products are the products they are familiar with,” Moody’s analyst Richard Cantor wrote in the letter.

Moody’s also asked for comment on designations indicating higher risk that a security might be downgraded by more than one level. The New York-based firm also said it might leave the rating scale alone.

Moody’s on Monday raised its loss assumptions to as much as 17.8% on 2006 sub-prime bonds packaged into collateralized debt obligations, heralding further downgrades as defaults increase.