Weak struc­tures can pre­vent top rat­ings for RMBS

The Pak Banker - - COMPANIES/BOSS -

Res­i­den­tial mort­gage backed se­cu­ri­ties (RMBS) with weak struc­tural frame­works are not likely to earn a Aaa (sf) rat­ing from Moody's In­vestor's Ser­vice even if they have strong prime loan pools and sat­is­fac­tory orig­i­na­tors and ser­vicers. Ac­cord­ing to a new report "Post Cri­sis U.S. RMBS Frame­works Yield Var­i­ous Credit Re­sults" RMBS with pro­vi­sions that sig­nif­i­cantly limit orig­i­na­tors' obli­ga­tions to re­pur­chase de­fec­tive loans, have a nar­row third­party pre-se­cu­ri­ti­za­tion due dili­gence scope, or a weak align­ment of in­ter­ests be­tween the spon­sor and in­vestors, are not con­sis­tent with Moody's Aaa (sf) rat­ing.

In its anal­y­sis of RMBS, Moody's weighs the ef­fec­tive­ness of the trans­ac­tion el­e­ments that pro­vide trans­parency and align in­ter­ests be­tween is­suers and in­vestors: the rep­re­sen­ta­tions and war­ranties (R&Ws), the pro­ce­dures avail­able to in­vestors for the en­force­ment of R&W breaches, the ro­bust­ness of the orig­i­na­tion process, and the scope of pre-se­cu­ri­ti­za­tion due dili- gence. "The de­cline of the US hous­ing mar­ket that led to in­vestor losses ex­posed lim­i­ta­tions and flaws in many as­pects of the RMBS frame­work ," says Kathy Kelbaugh, a Moody's Vice Pres­i­dent and co-au­thor of the report.

For an RMBS to earn a top rat­ing, in­vestors should be pro­tected against the risk of loss due to fraud­u­lent or de­fec­tive loans, and they should have ac­cess to ro­bust and re­li­able data that pro­vides trans­parency con­cern­ing loan terms, bor­rower credit and prop­erty val­u­a­tion

The report presents con­trast­ing ex­am­ples of struc­tural frame­works for RMBS: a strong frame­work, ex­em­pli­fied by those present in the post-cri­sis RMBS of­fered by Red­wood Trust, and an­other con­sis­tent with some pro­pos­als Moody's has re­viewed or dis­cussed with is­suers that ex­hibit weak­nesses that would re­sult in an in­vest­ment grade rat­ing in the A1 (sf) to A3 (sf) range.

The report also adds a brief dis­cus­sion of one pos­si­ble sce­nario un­der which the frame­work would be con­sis­tent with a rat­ing in the Aa1 (sf) to Aa3 (sf) range.

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