MoodyÕ: Super-priority lien warning positive for Freddie MacÕ latest securitization

Benefit limited to newest and future risk-transfer deals

The Federal Housing Finance Agency issued a statement warning last week that Federal law prohibits state courts from involuntarily extinguishing Fannie Mae and Freddie Mac liens to give precedence to so-called “super-priority” liens.

They cited that the relevant portion of Title 12 United States Code Section 4617 states that, while the FHFA acts as Conservator, “[no] property of the Agency shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of the Agency.”

Super-priority liens include such things as energy retrofit programs and homeownership association liens.

In the statement, the FHFA confirmed that it does not consent to any extinguishment of GSE liens in connection with HOA foreclosures.

Moody’s Investors Service says in a client note that the FHFA’s action is credit positive for Freddie Mac’s newest risk-transfer securitization, Structured Agency Credit Risk Debt Notes, 2015-DNA1, and other future GSE risk transfer deals in which investors bear actual, rather than fixed, losses because FHFA’s stance, if developing case law supports it, will result in lower losses owing to super-priority liens while the GSEs are under conservatorship.

“The statement has no direct benefit on other GSE risk-transfer securitizations because investors in those deals bear losses according to a fixed formula regardless of the magnitude of actual losses,” Moody’s says in a client note. “The statement will also have no direct benefit on private label RMBS because the Federal law it cites won’t apply to those deals. Indirectly, however, the FHFA’s statement, as well as servicing requirements Freddie Mac previously issued, are credit positive for the entire mortgage sector because they raise awareness about the risk of HOA super liens and encourage servicers to find ways to protect against them.”

Moody’s says that super-priority HOA liens pose a risk to RMBS. They note that two high state court rulings last year increased the risk of losses for RMBS trusts on loans secured by homes in “super-lien” states whose owners fail to pay HOA or condominium fees and the association then files a lien that it later forecloses on.

Moody’s does note that with the exception of Freddie Mac’s newest risk transfer deal, RMBS will not directly benefit.

Future GSE risk-transfer deals that incorporate this structure would also benefit, but only so long as the FHFA is the GSEs’ conservator.  

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