Fitch Ratings said it is reviewing RMBS backed by the Dutch National Mortgage Guaranty (nationale hypotheek garantie or NHG) as part of its criteria update for residential mortgage loans with this type of guaranty.
The aim of this review is to provide these bonds with greater protection from counterparty exposure and the risk of counterparty default, given the recent weakening credit profiles of a number of financial institutions.
The NHG is a guarantee provided by the Home-Ownership Guarantee Fund, a Dutch government sponsored institution, to cover the losses incurred on mortgage loans after the foreclosure or sale of a property.
In NHG-backed RMBS, the seller is committed to repurchase the defaulted loans that the guaranty fund rejects as fully or partially non-NHG compliant. According to Fitch data collected from various lenders, this rejection rate could be relatively high (in some cases as high as 45%).
Under Fitch's current criteria, the rating agency gives some credit to this repurchase obligation. For its 'AAA' rating scenario, the agency gives full credit to the commitment where the re-purchaser is rated 'AAA'. Partial credit is given where the originator/repurchaser is rated investment grade, and no credit is given for entities rated below investment grade.
"As such, only a portion of the residual losses due to non-compliance with the NHG eligibility criteria is taken into account when the originator is investment grade-rated," Fitch analysts explained. "Since the originator may also act as a swap counterparty in the same transaction, this substantially increases the degree of exposure to the originator as a counterparty and, thereby, the risk of downgrade due to a weakening of the credit profile of the originator."
The ongoing criteria review could lead to a reduction in the amount of credit given to the mandatory repurchase commitment.
Consequences are still unknown, but Fitch stated that "a substantial reduction of the credit given to the repurchase commitment for 'AAA' and 'AA'-rated entities could result in the 'AAA' ratings of certain NHG-backed RMBS tranches migrating to the 'AA' range". The agency currently maintains ratings on 41 tranches of 15 Dutch RMBS backed by NHG, equating to a total amount outstanding of E17 billion.
Moody's Investors Service said that Dutch RMBS Q3 performance figures remain stable. Although cumulative foreclosures have increased, they are still relatively low. Transactions with a high portion of NHG-insured loans have clearly performed better than non-NHG insured transactions. The rating agency found that 60-day delinquencies of fully NHG guaranteed loan pools are 0.25% below overall index levels.
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