The rise in home prices will continue to benefit residential mortgage-backed securities issued between 2005 and 2008. 

That’s the good news. 

However, many risks remain that will limit how much the bond performances improve, according to Moody’s Investors Service.

Moody’s expects losses tied to loan servicing issues to significantly offset the benefits from borrowers having greater incentive to keep up on mortgage payments as they witness the values of properties rising.

Additional risks to the performance of securitizations include rising interest rates and structural weakness in some transactions that expose the bonds to declining credit enhancements. 

The combination of positive and negative factors on RMBS will result in re-evaluating some bonds for upgrades and others for downgrades.

“Given the complexity of many RMBS structures, some bonds will benefit from the overall improvement in loan performance, while others will be more affected by the downside risks,” says Moody’s Analyst Jiwon Park, an author of the report.

Servicing issues that could offset the benefits of improving mortgage performance range from loss mitigation decisions to cash flow disruptions from future servicing transfers. 

“Although the mortgage servicers have been clearing their pipelines of delinquent loans, both by loan modifications and stepping up short sales, they continue to face numerous challenges,” says Moody’s Vice President Peter McNally, an author of the report.

He added, “These include dealing with the long timelines for foreclosure, which will press losses upwards, and the need to liquidate a high number of loans in serious delinquency.”