In an attempt to standardize RMBS data across Europe, the Middle East and Africa (EMEA), Moody's Investors Service said it is looking to hedge through the inconsistencies in redemption rate reporting. The move was made to shed more light on Constant Prepayment Rates (CPRs) and Total Redemption Rates (TRRs).
"When analyzing structured finance transactions through the use of cash flow models, one key determinant is the repayment and prepayment behavior," said Moody's analyst Johannes Ebner, who authored the report. "In order to determine the received principal that contributes to the pay-down of the issued notes, it is necessary to have reliable payment assumptions for the underlying collateral."
Moody's currently monitors a little more than 670 RMBS transactions in the EMEA region, and "prepayment rates are frequently not easily available for securitized portfolios, which makes it challenging for investors to predict the average life of a transaction and its notes," Ebner added.
Reporting standards also vary considerably across the EMEA market. This makes redemption rate comparison difficult, especially considering the large number of market participants that provide performance data for RMBS transactions, often using different words to describe the same things, Moody's said.
"In particular, there are different definitions of scheduled or unscheduled redemptions of a securitized pool (where such categorization exists at all)," the report said. "In addition, reports include scheduled payments and unscheduled payments but do not state in detail which amounts were used to calculate the reported redemption rate or explain the exact differences between the various redemption or payment amounts listed in the servicer report." In some instances, Moody's said, there was no indication if the stated redemption rate was at an annualized or periodical basis.
Ebner said that Moody's computed the CPR and TRR information independently, using a standardized method put forward by the European Securitization Forum (ESF). However, it should be noted that the ESF has yet to clarify what is considered a "scheduled" or "unscheduled" payment for redemption rate calculations, so Moody's provided its own interpretation of that data in the report.
Monitoring repayment rates is key to finding out how buyers will respond to tightening lending criteria. Some market players believe that with a worsening credit environment and an ailing housing market, buyers may not have the same refinancing options, causing redemption rates to cool over the short term.
"In a positive environment, remortgaging is an easier process for the borrower, as they can obtain an initial mortgage of 80% LTV," Barclays Capital analysts said. "Then, on remortgage, given house price increases with no repayment of the actual loan, the LTV can decrease fairly significantly. Due to this new valuation and lower LTV, a new or existing lender is willing to lend to the borrower at lower rates than if the LTV was at 80% (due to the risk-based model most NC lenders use)."
But negative house price inflation makes remortgaging more difficult. Barclays said that the loan at remortgage may increase in LTV, particularly if the loan is an interest-only mortgage, which may make the borrower unable to remortgage at a lower rate.
"In a worst-case scenario, if the LTV on remortgage is significantly higher, the borrower may not be able to remortgage at all if there's no lender willing to take on that business," Barclays analysts said. "This would leave the borrower on the high SVR of the original lender, which would provide a significant payment shock, thus increasing the likelihood of arrears and defaults."
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