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Government mortgage aid could destabilise RMBS, says Moody’s

The proposed Government-backed mortgage aid for those out of work could severely affect the Residential Mortgage Backed Securities market, according to Moody’s.

The eight largest banks in the UK have agreed to be a part of the scheme, which could allow those not earning up to two years reprieve from mortgage payments. But the credit reference agency says this could have major repercussions on the workings on the RMBS market.

Although the plans are in their preliminary stages, the basic tenets of the proposal will allow households that experience “a significant and temporary loss of income” to defer a proportion of their mortgage payments.

Moody’s says there are possible liquidity and credit implications to RMBS if the scheme goes ahead.

It says the scheme may lead to liquidity shortfalls in some transactions by effectively increasing the amounts of delinquent loans because borrowers may cease all payments whereby previously they may have been able to maintain at least some or all of their payments.

Moody’s also says the plan could increase the ultimate credit loss to the transaction if house prices continue to drop.

The rating agency fears that if a significant number of eligible borrowers within a security choose to exercise their new rights, 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.

Moody’s says such triggers are in place to just to benefit noteholders, meaning an early breach could help the transaction. However, it says by reporting such borrowers as being current could artificially delay trigger breach and therefore negatively impact noteholders.

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