Press reports continue to mount over the possible exit of Greece from the eurozone, which can cause Greek RMBS defaults.
The Royal Bank of Scotland analysts, in a report today, said that since the majority of the deals are written under English law, an immediate consequence of the redenomination of the Greek currency will be on mortgages. These loans, which are local contracts, will be unilaterally redenominated in the new currency.
Investors have had some experience with similar situations. According to RBS, several east European countries have a recent history of making mortgages in foreign currencies, including U.S. dollars, euros and Swiss francs.
In Hungary, where 53% of the $21.3 billion mortgage market was in Swiss francs (CHF), the government recently passed a law allowing borrowers to pay their mortgages in Hungarian forints (HUF) at favorable exchange rates. Russia and Ukraine also have foreign currency mortgages that have been securitized, according to the report.
But English law only allows for bonds to be legally redenominated under a multi-lateral agreement.
"In the absence of such an agreement, these foreign law bonds seem likely to default in most cases, causing the waterfall to go sequential," RBS analysts wrote. "Given the serious consequences, it is likely that there will be a multi-lateral agreement."
Fitch Ratings said in a report last week that the key risk for Greek RMBS is redenomination in the event that Greece departs the euro. The rating agency revised the country's ceiling to 'B-' and as a result downgraded all bonds rated above 'B-' to be downgraded to 'B-'.