Greek banks and RMBS transactions are at risk of losing interest payments because a Greek housing agency has delayed, if not frozen, paying interest subsidies, according to Fitch Ratings.

The Organismos Ergatikis Katikias (OEK), the Greek Workers Housing Agency, started delaying payments on interest subsidies in 2009, but issuer reports for some RMBS transactions still showed subsidy payments being received. This was because the originating banks were making the payments on the OEK's behalf. The OEK is legally obliged to pay the subsidies.

If the OEK and the Greek banks stop paying the subsidies, the RMBS transactions will eat into their reserve accounts, Fitch analysts explained.

"Once a reserve account is fully depleted, some transactions can use principal receipts to pay interest on the senior notes," Fitch analysts said. "However, the chances of an interest shortfall to the notes increase significantly if a transaction is reliant on principal proceeds to pay interest. In many transactions an interest shortfall on the senior notes is effectively a default."

If the OEK defaults on the subsidy payments, the borrower is legally liable to pay the full interest amount of the loan. "Most borrowers are not aware of this obligation and such a payment shock would likely lead to a spike in delinquencies, defaults and eventually losses," Fitch analysts stated.

Some of the banks that had originated RMBS transactions have decided to make the payments on the OEK's behalf to support their transactions. One motivation for this is to maintain the eligibility of the senior notes for repos, providing valuable liquidity.

Other banks haven't. For example, T Bank has stopped making payments on behalf of the OEK in the Byzantium Finance and Byzantium II Finance transactions. Fitch believes that other banks may also stop if they no longer consider it beneficial.

In addition to the Byzantium transactions, Fitch rates three other RMBS transactions that have OEK-subsidized loans: Estia Mortgage II, Stegasis Mortgage Finance and Themeleion IV Finance.  

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