Moody’s Investors Service said in a special comment Monday that certain proposals for residential-mortgage backed securities the agency has received would end up with ratings between ‘A1 (sf)’ and ‘A3 (sf)’ due to weaknesses in the representations and warranties that are embedded in the deals’ collateral.

The agency did not say when it reviewed these proposals, but it sounded similar to a warning delivered by Fitch Ratings last week about problematic reps and warranties in recent transactions.

Moody’s said that A1 would be essentially be the ceiling for deals that have narrow pre-securitization due diligence and in which originators face limited obligations to buy back defective loans while the interests between the sponsor and investors are not well aligned.

One problem with deals of this nature is materiality standards that are broad. This would reduce the likelihood that a borrower would buyback a flawed loan. As an example, under such an approach, a loan that was incorrectly assigned an LTV of 60% because of a faulty appraisal process could remain in the pool provided its LTV didn’t rise above the 80% stipulated by the structure. This would not be consistent with a triple-A under Moody’s criteria.

The agency added that if transactions failed to meet only one standard for a top notch rep and warranty framework it could potentially achieve up to a ‘Aa1 (sf)’ rating.    

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