BK Bill Could Force Losses on 'Good' MBS

Obscure clauses in securitization documents could spell big losses for depositories if Congress passes mortgage bankruptcy legislation, according to a report in American Banker. U.S. banks and thrifts hold hundreds of billions of dollars of non-agency mortgage-backed securities. Most if not all of these bonds are rated triple-A, meaning that normally they would be well cushioned against any loss, as lower-rated classes would take a hit first. However, many securitization documents contain language that identifies bankruptcy as a condition in which all bondholders share losses equally. According to a report by Credit Suisse, pending cram down language "will be a distinct negative for many senior prime RMBS bonds that have a unique feature wherein bankruptcy losses are set at a maximum dollar amount, beyond which additional bankruptcy-related losses will be allocated to all bonds regardless of seniority."