Despite Standard & Poor’s Corp. announcement that it would evaluate the credit quality of the collateral backing RMBS insured by G.E. Mortgage Insurance, following its announcement that the insurer would no longer maintain a triple-A rating, downgrades are seen as unlikely, sources believe. The reasoning being that the risk of a downgrade is easily mitigated by the issuer, and precedent has shown this to be the case, should a downgrade be imminent.
As S&P notes in its release, most U.S. RMBS transactions insured by G.E. Mortgage Insurance Corp. are sufficiently seasoned, from seven to 17 years, and thus the loan-to-value ratios for the pools are below 60%. Australian MBS transactions insured by unit GEMI, which have gained investor favor over the
past two years, are sufficiently enhanced to maintain current ratings, bankers said.
But, as noted by Peter DiMartino, head of ABS Strategy and Research at RBS Greenwich Capital, this raises an oft-overlooked risk for investors, “that downgrades can occur even when collateral performance is not problematic.”
It is more likely that an issuer would step in with additional insurance, rather than see its outstanding bonds downgraded. For example, InterStar Mortgage, which has sold three global Australian MBS in the past two years and is prepping another, purchased additional insurance following a similar downgrade of U.K. insurer Royal & SunAlliance, sources said.
But as RBS Greenwich’s DiMartino notes, investors may be better off relying not on third-party credit enhancement, but rather on the structure. “Many investors, especially those knowledgeable in residential mortgage credit risk and other on-the-run ABS sectors, prefer pure senior-subordinated transactions to externally enhanced transactions as a means to eliminate that risk.”
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