Moody's placed on review for possible downgrade more than 500 tranches from 125 deals of GMAC-serviced residential mortgage-backed securities (RMBS) rated Baa3 and higher due to ‘specific servicing concerns,’ the agency reported Thursday.
GMAC Mortgage LLC (GMACM), a wholly owned subsidiary of Residential Capital LLC, acts as the primary servicer.
‘We have become aware that the servicer has employed cash management arrangements for certain GMACM-serviced RMBS that could give rise to competing claims in a bankruptcy proceeding," the Moody's note says.
The review centers on GMAC's commingling and netting of cashflows of multiple RMBS deals in a shared custodial account. GMAC's netting process entails the offsetting of excess cash in the custodial bank account after required principal and interest (P&I) payments against required servicer advance obligations on each remittance date.
The netting of servicer advance payments is a standard industry practice, Moody's notes, though it is typically only done on advances made within one RMBS deal.
Because multiple RMBS deals are included in a shared bank account, GMAC's netting process allows it to commingle some cash collected on all of the RMBS deals and allows it to apply cash collected from one RMBS deal – but not due until a future remittance date – to cover P&I servicer advance obligations on another RMBS deal, Moody's explains.
This netting process increases the likelihood that some RMBS deals may not be able to recover the amounts ‘borrowed’ by the servicer to fund advances on another RMBS deal if a servicer bankruptcy were to occur, Moody's adds.