Of all the unintended consequences of the chaos in the US mortgage markets, the impact on RMBS noteholders of stalled foreclosure proceedings might be the most perverse.
Each mortgage securitization is established using a pooling and servicing agreement (PSA). This sets out the rules under which the mortgages in the pool are serviced and directs cashflows into the structure to a reserve account. These monies are then distributed to bondholders in line with the waterfall laid out in the prospectus until such time as the mortgage trust structure is dissolved – for example, through foreclosure on the assets in the pool.
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