Billions of dollars in residential mortgage-backed securities serviced by a GMAC Inc. subsidiary could be negatively impacted in bankruptcy proceedings because of cash management practices at the company, according to a new ratings agency report.
Moody’s Investors Service warned today that it placed $5.9 billion in RMBS serviced by GMAC Mortgage LLC on review for a possible downgrade. The downgrades impact 569 tranches from 125 securitizations issued between 1999 and 2007.
The New York-based ratings agency said it has discovered that cash-management arrangements being used by GMAC could give rise to competing claims in a bankruptcy proceeding.
“The practices in question involve commingling and netting of the cash flows of multiple RMBS deals in a shared custodial bank account,” Moody’s explained. “If these competing claims are successful in diverting cash, they could adversely affect the probability that certain of the affected RMBS will be paid in full.”
Moody’s said that the servicer’s netting process involves offsetting excess cash in the custodial bank account after the required principal and interest payments have been made by GMAC on each remittance date.
While such a procedure is a common industry practice — Moody’s noted that it is typically only done on advances made within one RMBS deal; the advances are not typically used to offset servicing advance obligations on another RMBS transaction.
“In the case of the RMBS subject to this action, because multiple RMBS deals are included in a shared bank account, the netting process allowed the servicer to commingle some cash collected on all of the RMBS deals and allowed it to apply cash collected from one RMBS deal, (but not due until a future remittance date), to cover P&I servicer advance obligations on another RMBS deal,” the statement said. “Allowing the netting process to occur across RMBS deals in a common bank account increases the likelihood that some RMBS deals may not be able to recover the amounts ‘borrowed’ by the servicer to fund advances on another RMBS deal if a servicer bankruptcy were to occur.”
GMAC has previously discussed a possible bankruptcy for Residential Capital LLC — which owns GMAC Mortgage LLC. ResCap is itself a subsidiary of GMAC Inc.
But the servicer says there is nothing wrong with its practices.
“GMAC’s netting process is, and always has been, in compliance with all investor guidelines, and we continue to pursue ways to improve our overall processes and reduce risk in the business,” a GMAC spokesman said in a statement to MortgageDaily.com.
