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Moody’s Expresses Concerns Over Weak RMBS

As ""Moody's"":http://www.moodys.com/ rates residential mortgage-backed securities (RMBS) in post-crisis years, the firm continues to harbor some concerns about the strength of some loan pools.


""The decline of the US housing market that led to investor losses exposed limitations and flaws in many aspects of the RMBS framework,"" Moody's Investors Service stated in a report authored by VPs Kathy Kelbaugh and Yehudah Forster.

These flaws include misalignment of investor and issuer interests, insufficient or unreliable loan data, and instances in which the risk of fraudulence or defective loans falls to investors.

Moody's maintains some of these flaws continue to exist in today's market.

In the report, Moody's pointed out several risky representation and warranty features the firm continues to find in the RMBS market today.

The expiration or sunset of representations and warranties is one weakness Moody's highlights.


Recently adopted by the GSEs, sunset clauses ""are problematic because they expose investors to defects that appear later in the life of the loan,"" according to Moody's.

""These sunsets are particularly questionable when they apply to loans that have shown signs of troubled performance prior to the sunset,"" Moody's said.

Another concern is ""expanded materiality factors,"" which ""allow loans that are clearly riskier than originally disclosed to remain in the pool because they still fall within the originator's underwriting or program guidelines,"" Moody's stated.

Some RMBS representations and warranties make concessions for borrower life events â€" such as death or divorce â€" letting the originator off the hook when a loan defaults due to these circumstances. Moody's contends borrower life events are often associated with default, and these defaults, nonetheless, could reveal risky lending.

Representation and warranty clauses that limit breach reviews can also cause investors to suffer undue losses, according to Moody's.

Similarly, clauses that hold originators responsible for only some loan data while ignoring other data sets ""reduces the originator's incentive to provide accurate, reliable data,"" Moody's said.

Moody's also objects to procedures that direct a loan reviewer to ""presume that no breach has occurred, in all but the clearest cases.""

Third-party diligence reviews are an important part of any RMBS transaction, and Moody's suggests these reviews be comprehensive.

Moody's supports thorough and transparent loan-level data in all RMBS transactions and maintains that investors' and issuers' interests should be aligned.


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