Among more immediate implications of widely publicized foreclosure procedure concerns for some existing residential mortgage-backed securities at press time last week was the indemnity question, although there are several other developments to monitor.
While analysts at Moody’s Investors Service are monitoring a host of other developments related to the foreclosure issues, it’s the indemnity question in concert with the extension of foreclosure timelines and associated rise in costs that have been the immediate reasons contributing to putting or keeping GMAC/Ally’s affected RMBS on review for potential downgrades.
“Indemnity is more of a concern at this time” than implications such as, for example, the possible advantages to junior bondholders and the disadvantages to senior bondholders, Amy Tobey, Moody’s vice president and senior credit officer, told NMN. However, Moody’s also is monitoring the latter and several other existing and potential developments, she told this publication.
But a more immediate concern is that typically under transactions’ documentation servicers indemnify certain costs to the trusts, and those costs could increase from the procedural foreclosure delays, Moody’s VP/senior credit officer, Eric Fellows, told NMN. This is less of a concern for entities with relatively stronger credit profiles and ratings such as Bank of America and JPMorgan Chase than for an entity like Ally/GMAC, which has a weaker credit profile.
As some may recall, according to Moody’s, this is not the first servicing-related concern to affect the ratings of Ally/GMAC. Ally/GMAC earlier wrestled with shared custodial trusts and commingling of collections on mortgages directly held by the company, as well as subservicing issues involving “ineligible accounts” that did not have the ratings Moody’s required.
However, Moody’s analysts said the company had resolved all of the problems to its satisfaction—in some cases, for example, by taking on the subservicing tasks itself as a servicer to make sure eligible accounts were involved. Moody’s was about to take affected RMBS ratings off review when the foreclosure issue hit. The analysts said two different parts of the servicing company were involved in handling the prior commingling, shared trust and ineligible account issues vs. the more recent foreclosure issues.
While it may not quite be in the spotlight as far as reasons for Moody’s rating reviews yet, issues for RMBS investors currently to consider in terms of recent foreclosure issues do include the highly publicized and somewhat counterintuitive effect they can have on junior and senior bondholders.
Among other things, a recent Amherst Securities Group LP research report notes that something to keep in perspective is that the disadvantage to senior bondholders is relatively small. While junior bondholders benefit notably from the delays in foreclosure as they continue to receive interest payments—rather than having their payments effectively cut off when foreclosure occurs—they hold a smaller percentage of the deal than the senior bondholders, Laurie Goodman, lead author of the Amherst report, told NMN.
In reviewing sample deals and potential effects on cash flows, Amherst found changes might be less substantial than investors expected. The report found that at the time it was written last week there was no effect from the development on bond prices. But the report noted that valuations on senior tranches with high delinquencies could inch downward.
