The servicing issues affecting the Kazakh Mortgage Backed Securities 2007-1 B.V. transaction might not be limited to emerging markets deals, Fitch Ratings said.
It might also expose operational and potential credit risks inherent in EMEA structured finance transactions.
"The trustee's reluctance to transfer servicing to the stand-by servicer in the Kazakh MBS deal and the back-up servicer's attempts to renege on its obligations are not particularly surprising or unique, as the migration of any servicing portfolio from one entity to another involves risks that are further exacerbated when the involved parties are resistant to such action," said Edward Register, senior director, at Fitch's EMEA structured finance operational risk group.
From the trustee's perspective, maintaining the servicing of Kazakh MBS with BTA Ipoteka (BTAI), a subsidiary of Kazakhstan's second-largest bank, BTA Bank, is preferable to initiating a transfer to an unwilling back-up servicer such as Halyk Bank of Kazakhstan. This is particularly given the type of loans in the portfolio that Halyk claims it cannot service.
Fitch believes such issues to be minimal in more advanced economies with well-developed mortgage markets and sophisticated servicing environments.
However, while there are some transactions in EMEA markets where the stand-by servicer has a right of refusal following invocation of the stand-by arrangement, such a provision does not exist for Halyk.
Fitch believes that should the trustee in the Kazakh MBS example have to enforce the stand-by agreement, Halyk would be contractually obligated to assume the servicing role or face potential legal action.
"Fitch views back-up servicing arrangements as an appropriate mitigant to servicing disruption events triggered by a servicer default," Register added. "However, to fully capitalize on the stand-by arrangement, the agreement needs to be legally binding and the back-up servicer needs to be able to effectively service the types of loans included in the relevant transaction."