Fresh from the realisation that Gordon Brown’s mortgage holidays may only help 9,000 people in the UK (according to Margaret Beckett), Moody’s now puts another spanner in the works for the government’s illustrious plan.
Specifically, the ratings agency is concerned about the problem early delinquencies may cause anyone owning a slice of UK RMBS and for banks generally, a fact also noted by the FT’s Lex column Friday.
Moody’s view is the plan could have liquidity and credit implications for RMBS transactions. They explain (emphasis FT Alphaville’s):
The scheme may lead to liquidity shortfalls in some transactions by effectively increasing the amounts of delinquent loans; eligible borrowers may cease all payments whereby previously they may have been able to maintain at least some or all of their payments. Additionally the economic environment, and crucially house prices, may fail to improve or even worsen resulting in a lower recovery value and thereby increasing the ultimate credit loss to the transaction.
If a significant number of eligible borrowers in a transaction choose to exercise this option, and they are reported as delinquent, delinquency triggers might be breached earlier. Some of the consequences of a trigger breach in UK RMBS include the prevention of future substitutions, further advances, loan conversions and reserve fund amortisation and typically result in sequential allocation of cash flows in the transaction. Generally such triggers are in place to benefit noteholders, meaning an earlier breach could be positive for the transaction. However, reporting such borrowers as being current could artificially delay trigger breach and therefore negatively impact noteholders.
Furthermore, it is common for UK RMBS transactions to have restrictions on loan modifications and in particular term extensions which, if breached, would require the seller to re-purchase the loan out of the RMBS pool.
Oh dear.
All of which leads Alphaville to reprise this popular British pop song:
“We’re all going on a summer mortgage holiday.
No more working for a month year or two.
Fun and laughter on a summer mortgage holiday.
No more worries for me and you.
For a week year or two.”
“We’re going where the sun shines brightly banks lend lightly.
We’re going where the sea is pound is blue.
We’ve seen it depression in the movies.
Now lets see if it’s true.”
“Everybody has wants a summer mortgage holiday
Doing things they always wanted to.
So we’re going on a summer mortgage holiday
To make our Gordon’s dreams come true
For me and you. “