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Aid may destabilise securities

The Government’s mortgage aid package could destabilise the residential mortgage-backed securities market, says Moody’s.

The aid package will allow people losing their job or a substantial part of their income up to two years’ reprieve from paying interest on their mortgage but Moody’s warns that this could have major repercussions for RMBS.

Moody’s says that by allowing a two-year holiday, liquidity shortfalls in RMBS will increase. It says this break effectively increases the amounts of delinquent loans – borrowers cease all payments where once they may have been able to maintain at least some payments.

The agency fears that if enough borrowers within a security choose to exercise their new rights, delinquency triggers might be breached earlier and says these triggers will impair the workings of RMBS.

In the US last week, hedge fund Greenwich Financial Services took Bank of America to court to demand it buys back $80bn of mortgage assets before it modifies them. The lender has pledged to modify hundreds of thousands of mortgages to help people in arrears but Greenwich says this will negatively affect the securities.

A Bank of America spokesman says: “This programme proactively addresses a potential for far greater investor losses that would be realised if not for us undertaking mod-ifications.”

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