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Lender downgrades would affect RMBS payments, warns Moody’s

A number of residential mortgage-backed securities are at risk of losing mortgage payments following a downgrade review of UK banks, warns Moody’s.

In its Credit Insight report published last week, Moody’s says any downgrade actions on lenders resulting from its current ratings review are likely to have a significant impact on RMBS transactions originated by the affected banks.

In February, Moody’s placed 114 European banks on review for a possible downgrade.

Olga Gekht, lead author of the report and senior analyst at Moody’s, says that for RMBS transactions where the originator also acts as the account bank into which borrowers make their payments, there is a risk the payments will be lost.

She says that if the originator firm becomes insolvent, the collections could become intermingled with the estate, making them temporarily or possibly even permanently unavailable to the transaction.

For some transactions, borrowers’ payments would be redirected to a third party account if the seller’s rating fell below a certain point, but for those without such a caveat, Gekht warns a substantial downgrade of the originator’s rating would increase the transaction’s exposure to the risk of lost payments.

Such transactions include Lloyds Banking Group’s Mound Master Trust, Santander UK’s Holmes Master Trust and Barclays’ Lothian Master Trust.

Gekht adds that there is an additional risk for those transactions without a requirement to appoint a back-up servicer or facilitator if the rating of the current servicer falls below a certain level.

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