GMAC Mortgage's (GMACM) corrective actions related to an unusual servicing practice that could hurt ratings on nearly $6 billion of RMBS it services are scheduled for completion by April 1, according to a Moody's Investors Service report.
The rating agency said it is monitoring the corrective actions and will consider them in the context of almost $6 billion GMACM RMBS currently on review for possible downgrade. The practice being corrected is that of netting the cash flows of multiple residential MBS in a single custodial trust.
This could lead to competing claims in a bankruptcy scenario, particularly given that GMAC's parent company, Residential Capital, has the lowest rating possible before default, said Moody's Vice President Eric Fellows. (GMACM and ResCap are both downstream affiliates of GMAC Financial Services, a bank holding company.)
The netting practice is not typical in the industry, said Bill Fricke, a Moody's vice president whose responsibilities include a focus on servicing issues. He said if the rating agency did discover another servicer using such a practice it would be a "red flag," regardless of what the rating of the corporate entity involved was. Moody's said GMACM also previously had a similar issue involving "certain notes associated with its servicing advance facility" that it believes the ResCap subsidiary has corrected by establishing "segregated trust-specific custodial accounts for RMBS trusts."
There were roughly several hundred million dollars worth of SAF notes that were placed on watch for possible downgrade in February as a result of this and they will probably remain there until Moody's has finished monitoring them through a full cycle ending in March, Fellows said.
Moody's said GMACM has a similar corrective plan for the close to $6 billion in RMBS affected by the more recent review for possible downgrade. Moody's also will monitor this in a similar manner, Mr. Fellows said. ResCap, which has issued a statement saying it is correcting the situation, did not return a call for further comment. Fellows said the company has been "very receptive" to correcting the problem.