Although market analysts believe that the federal government's invocation of the Soldiers' and Sailors' Civil Relief Act of 1940 (SSCRA) will likely have minimal impact on ABS and MBS, a report from Nomura Securities last week pointed out that the Act can potentially affect different asset classes in various ways, depending upon how strongly each asset class is bolstered by credit enhancement mechanisms.
Given that the Defense Department has authorization to activate up to 50,000 National Guard and Reserve troops, reservists are now protected under the Act, which makes it more difficult for landlords or lenders to evict them when they are called to active duty. The law restricts mortgage rates to 6% or less for those on active duty and prohibits foreclosures. When active duty ends, the original interest rate is re-instated; the prohibition on foreclosures lasts until three months after the conclusion of an individual's active duty service in the military.
Similarly, Education Secretary Rod Paige ordered lenders and universities to postpone student-loan payments of those called to active duty. It is unknown whether this will be significant enough to affect student-loan ABS bonds.
The changes in mortgage rates, however, can potentially cause shortfalls in the payment structure of certain structured bonds. According to Nomura, the potential effect of this on outstanding securitizations depends upon whether credit enhancement structures are able to absorb the shortfalls caused or not.
"Different kinds of deals are treated differently by the Soldiers' and Sailors' Act," said Mark Adelson, the head of ABS research at Nomura. "Depending on the asset class, the shortfalls get absorbed differently."
For instance, in private-label MBS, credit enhancement generally does not absorb shortfalls attributable to the SSCRA. Therefore, in these deals, any such shortfalls would be allocated pro rata among senior and subordinate security holders.
GSE-issued debt, however, may receive the opposite treatment, Nomura says: the GSEs themselves might make up for the shortfalls.
Home-equity ABS is similar to private-label MBS, as credit enhancement in the form of subordination is generally not available to cover shortfalls from the SSCRA. However, according to Nomura, excess spread can be used to reimburse investors who have suffered reduced distributions because of the SSCRA. Moreover, the junior classes of securities are sometimes subordinated to the other classes, even with respect to shortfalls from the SSCRA.
Prime auto ABS deals use subordination for credit enhancement, which is available to protect senior holders against shortfalls attributable to the SSCRA. Therefore, the impact of the shortfalls would be concentrated in the subordinate classes.
On the subprime side of auto ABS, credit enhancement is available to protect investors from SSCRA shortfalls. However, certain wrapped transactions specifically carve out SSCRA shortfalls from the coverage of their bond insurance policies. Nomura's report notes that the SSCRA can be particularly significant in a pool of subprime auto loans because the interest rates on virtually all those loans tend to be much higher than 6%.
Finally, in the credit card sector, credit enhancement is generally available to cover SSCRA shortfalls. Therefore, the impact of the shortfall would be borne by the most subordinate classes, as long as the shortfalls occurred when there was not excess spread in a credit card deal.
Meanwhile, Standard & Poor's issued a press release last week minimizing the Act, saying that "the effect of the Soldier's and Sailor's Relief Act on mortgages of the current wave of reservists called to active duty should be minor, as they represent 0.10% of outstanding mortgages."
