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Earthquakes a Problem on New RMBS

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The proximately of the properties backing a new residential mortgage-backed securities transaction has warnings being issued about earthquake risk.

The transaction is Sequoia Mortgage Trust 2011-1.

According to Moody’s Investors Service, the issuance has a concentration of earthquake-vulnerable properties.

California properties — many in the San Francisco metropolitan statistical area — back 56 percent of the loans based on principal balances.

And there is a 63 percent chance that an earthquake of a magnitude 6.7 or higher will occur in the San Francisco Bay area, according to an April 2008 U.S. Geological Survey study cited by the New York-based ratings agency. The 1989 Loma Prieta earthquake, which rendered 9,202 homes uninhabitable, was referenced.

If a major earthquake were to strike the San Francisco MSA, the decline in the values of damaged properties, and the likelihood that borrowers could abandon properties whose value has plummeted, will likely result in either losses to senior certificate holders or deterioration of the credit quality of the notes to junk status,” Linda Stesney, a Moody’s managing director.

Moody’s said that the potential damage from a magnitude seven earthquake and its likelihood call for as much as an additional 50 percent enhancement on Aaa-rated tranches.

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