Securitizations that significantly limit repurchases are among structural weaknesses that could prevent residential mortgage-backed securities from getting Moody’s highest rating.
Narrow third-party due diligence or weak alignment of interests also could mean ratings below Aaa, “even if they have strong prime loans and satisfactory originators and servicers,” according to a recent Moody’s report.
Kathy Kelbaugh, a Moody’s vice president and co-author of the report, said among other things deals need to have representations and warranties that provide sufficient access to repurchase remedies in the event of fraud, something that has been lacking in some proposed deals.
“We understand efficiencies when it comes to forensic reviews for breaches or reps and warrants, but they can’t be a barrier to repurchases,” she said.
Analysts are “unable to quantify” fraud risks, so at a certain point significant weakness in a deal’s structure when it comes to “alignment of interests” can be so great they cannot be offset by credit enhancement or due diligence to the point where a Aaa rating can be achieved, Moody’s vice president, senior credit officer/manager Kruti Muni said.
Among the elements of reps and warrants Moody’s will look at carefully in doing this are proposed “sunset provisions” for risk, which have varied greatly in some private-label proposals, said Yehudah Forster, a Moody’s VP and co-author of the report.