The Chicago city ordinance establishing mortgage lender liability for vacant buildings that are caught in the foreclosure process will be credit negative for RMBS deals, Moody's Investors Service said.
The rating agency said that lender liability laws increase mortgage lending transaction costs, which will rise significantly if this ordinance inspires similar laws in other parts of the U.S.

"Unless future [RMBS] pools exclude poor credit quality borrowers who are likely to end up in foreclosure, lender liability laws of this kind are credit negative," said analysts in a Moody's report.
The new Chicago city ordinance broadens the definition of the owner of vacant buildings and in doing so picks up mortgage lenders and assignees, such as RMBS securitizations.

Lenders must now determine vacancy, ensure safety as well as provide maintenance and upkeep during the foreclosure process, even if actually do not own the the property yet.
The ordinance introduces complicated problems, and the questions raised will make securitized mortgages vulnerable to this law less attractive to investors, according to the rating agency's report.

The cost of liquidating a mortgaged property after the lender has foreclosed on it will increase under the new ordinance and Moody's said that credit enhancement sufficient to cover such unknown costs will be expensive.
"We expect future RMBS pools with exposure to borrowers with high foreclosure risk to limit or exclude geographic locations with such lender liability laws," said Moody's analysts in the report. "Poor credit quality borrowers in jurisdictions with unclear or indefinite foreclosure processes expose RMBS transactions to longer foreclosure timelines and higher transaction costs under this type of law.

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