Moody's sees minimal risk to RMBS from robo signing, MERS litigaton
The risks posed to residential mortgage-backed securities by the robo-signing debacle are extremely low to moderate and should have a limited impact, according to Moody's Investors Service. Analysts said missing or defective documents during the foreclosure process present a medium risk to RMBS, but most of the problems are fixable and simply lead to delays and consequently increased costs more than anything else. "But there will be a material residual of cases where practical proof issues and judicial frustration may stymie and prevent foreclosure," according to Yehudah Forster, Moody's vice president and senior analyst. Moody's said the practice of robo signing, or when mortgage servicers processed foreclosure documents without verifying information, only affects loans already in foreclosure or real estate owned by RMBS trusts. Still, it could lead to some additional losses on unsold REO, according to analysts. Earlier Monday, the Congressional Oversight Panel put together by the Treasury Department to investigate documentation problems in the mortgage industry, said the fiasco could call into question the validity of up to 33 million mortgages. Other problems facing RMBS include the ability to enforce mortgages registered in the Mortgage Electronic Registration Systems and the validity of trusts' tax-exempt status. Although these two issues are low and extremely low risks, the analysts said. Moody's doesn't expect questions surrounded the validity of a property foreclosed upon by MERS to significantly impact the RMBS space. "Because even if MERS doesn't have standing to foreclose in its own name, MERS can assign the mortgage to the RMBS trust, which through the servicer may then foreclose," analysts said. Other analysts agree that potential lawsuits against MERS, which was created by the industry and tracks mortgages transfers through the secondary market, won't have a large impact on MBS. Moody's analysts also expect claims of improperly transferred ownership of mortgages at closing that would jeopardize the tax-exempt status of a Real Estate Mortgage Investment Conduit, or REMIC, to fall on deaf ears. The challenge "erroneously equates the concept of record ownership of the mortgage, which may in fact transfer some time after the closing date, with economic ownership of the loan, which was transferred to the trust at closing." Write to Jason Philyaw.