The mortgage bond market is as susceptible to negative headline risk as any other capital market. However, performance appears solid in the wake of potential widespread foreclosure moratoria. After a solid September performance in the bond market, players in the residential mortgage backed securitization space do not appear overly concerned that the recent robo-signing allegations will somehow negatively knock on their trading. The expectation is that, while only Ally Financial, formerly GMAC mortgage, and JPMorgan have come forward so far, other large servicers will soon weigh in with similar admissions that their foreclosure affidavits may be faulty. Both are reviewing documents signed by robo-signers: employees without knowledge of the case or a notary present. “So what does this mean for pricing to the assets in RMBS?” asked one trader. “In my humble opinion it means absolutely nothing.” If foreclosure timelines become extended, in the wake of robo-signing allegations where several states attorneys general are calling for moratoria, mortgage bonds will also become extended. “From a political point of view, there is a tendency to kick the can forward and delay the problems, but in order to establish a floor on prices the sooner we can get capital into the market the better,” said Ron d’Vari, portfolio manager and member of the Investment Strategy Group New Oak Capital. “Pushing foreclosures more than six months down the line pushes the capital back.” However, an RMBS manager at one capital market group HousingWire spoke to said the majority of investors currently involved in trading RMBS performed stringent performance modeling. “Anyone who bought RMBS from 2006 and 2007, vintages from when presumably these robo-signed foreclosures were inked, would have run the collateral through extended resolution scenarios,” he said. The source expects bond rallying to continue and estimates that problems would not emerge unless the robo-signing issue is not resolved in less than six months. “RMBS right now is trading like stocks,” he said. “Besides, in the year-end, the book always goes up, it’s window dressing the portfolio.” Another bond trader suggested that every single major servicer will face problems similar to Ally and JPMorgan, but still expects RMBS to remain well-valued considering overall loss severities are level and constant repayment rates remain healthy. “I still got the bull view on even though you are going to have to read all these stories about other servicers who had robo=signers at the wheel,” he said in an e-mail. Write to Jacob Gaffney.
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