An unexpected move last month by a residential mortgage-backed securities trustee has created new risk for investors in non-agency deals issued prior to the financial crisis.
Wells Fargo Bank, N.A., as trustee for RMBS transactions, in June notified bond investors that it would withhold some of the funds from clean-up calls of 20 transactions.
The move was made so that the
Sioux Falls, South Dakota-based financial institution can establish reserve accounts to cover current and future legal expenses on the deals.
A structured finance report from Moody’s Investors Service indicated that the total withheld was around $91 million — or 17 percent of the total outstanding certificates.
This has emerged as a source of new risk for some pre-crisis RMBS transactions, according to Moody’s.
“Such reserves erode the amount of cash available to pay interest and principal to RMBS certificate holders,” the ratings agency stated.
The credit-negative characteristic will present more than 2,000 active RMBS with related risk. That is roughly half
of outstanding legacy private-label deals named in current lawsuits.
The highest risk is faced by transactions where the balances are near below where clean-up calls are allowed.
“Risks from litigation-related extraordinary expenses could emerge for other structured finance transactions whose trustees are not currently being sued,” Moody’s said. “However, RMBS issued after 2010 typically have features that mitigate these risks. Such features include disclosure of pre-closure due diligence, the presence of trigger events that require the review of loans for breaches of reps and warranties, and high-quality collateral originated in a tighter regulatory environment than existed prior to the financial crises.”
