RBI committee recommendations to be credit positive for RMBS

In May this year, the RBI had set up a committee on the development of housing finance securitisation market to review the state of the mortgage-securitisation market and make recommendations to address various issues relating to originators/investors as well as market microstructure.

Mumbai: The implementation of recent recommendations submitted by the RBI's housing finance committee will be credit positive for the country's residential mortgage-backed securities (RMBS), says a report.

In May this year, the RBI had set up a committee on the development of housing finance securitisation market to review the state of the mortgage-securitisation market and make recommendations to address various issues relating to originators/investors as well as market micro structure.

The report was submitted to Governor Shaktikanta Das on September 9.

After reviewing the existing state of mortgage-backed securitisation, it gave a host of recommendations on the legal, tax structures of mortgage-backed securitisation transactions and standardisation of such practices.

The report also recommended specific measures for facilitating secondary market trading in mortgage securitisation instruments.

Global rating agency Moody's in a report said the recommendations to standardize loan servicing processes across home loan lenders will make it easier to transfer loan servicing from one provider to another if the original provider fails.

"The recommendation would be credit positive for Indian RMBS because it will increase the likelihood that a suitable replacement can step in and take the place of a failed operator," the agency's assistant vice president and analyst, Dipanshu Rustagi, said.

The committee recommended linking home loans pricing to an external, such as the repo rate.

He said such a correlation will mitigate interest rate risk in RMBS transactions as it will remove the interest rate mismatch between lenders own benchmark rate and coupon rates.

The RBI recommended standardizing loan documentation criteria and establishing minimum loan eligibility and disclosure requirements for RMBS deals.

The move will increase transparency in the country's mortgage sector, reducing risks in the underlying loans backing RMBS deals, Rustagi said.

He said the recommendation on the tax treatment of securitization transactions will remove uncertainty for originators and investors.