NEW YORK (AP) - Moody's Investors Service expects to complete a report by the middle of next week assessing how much damage decaying mortgage quality will wreak upon a type of investment known as a collateralized debt obligation, a person familiar with the review said Friday.
In the meantime, reports cutting credit ratings on CDOs will trickle out as they are completed, according to the person, who spoke on condition of anonymity because they were not authorized to speak publicly on the matter.
CDOs are investments that splice layers of risk by packaging different types of securities -- including mortgage-backed bonds -- into a single investment. When Merrill Lynch wrote down the value of its portfolio by $7.9 billion this week, much of that was from investments in CDOs that lost value during the credit crisis this summer.
At least 40 reports downgrading or considering downgrading billions of dollars in CDOs were issued Friday, though the agency declined to estimate the value of downgraded CDOs.
Moody's, which assigns borrowers a credit rating implying how likely debt is to be repaid, earlier this month slashed its rating on $33.4 billion in bonds backed by home loans.
The investment banks that sell these mortgage-backed securities pool home loans into tranches and sell them as bonds. Moody's said the struggling housing market is discouraging people from paying their mortgages, which means people who bought these bonds are less likely to be repaid.
The downgrades earlier this month bode poorly for certain classes of CDOs.
Moody's is reviewing what the downgraded bonds mean for CDOs that carry them in their complex structures. The review moves in chronological order for CDOs issued from the beginning of 2006 through mid-2007.
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