Mortgage insurer’s problems in US could spill over to Australia

The credit ratings agency Moody’s is considering a downgrade of Australia’s largest mortgage insurer, a move that could knock down the ratings on $2.7 billion of investments.

Moody’s is considering a downgrade of the Australian arm of Genworth from A1 following a fourth quarter loss by its US parent, Genworth Financial Inc.

A downgrade automatically threatens a round of knock-on credit downgrades for more than $2.7 billion in bundled loans, known as residential mortgage-backed securities, which Genworth has insured.

The affected investments are known as ”junior notes”, which make up between 2 per cent and 12 per cent of the bundled loans insured by Genworth.

Moody’s believes the remaining senior notes in the bundled loans insured by Genworth will not be affected by any Genworth downgrades.

A vice president of Moody’s structured finance group, Richard Lorenzo, played down the impact of the downgrades on the broader securitisation market.

He said the market understood the possible downgrade was linked to Genworth’s parent, and not the performance of the underlying investments.

”Overall the reason we’re mixed on [the outlook of] the junior notes is not because of the collateral, the collateral is performing well; it’s because of the action on Genworth Australia,” he said.

Overall, Moody’s has given a ”stable” outlook for mortgage-backed securities transactions in Australia.

”Although we are still ascertaining the effects of the Queensland floods, our preliminary analysis indicates the absence of any ratings impact,” the ratings agency said.

The report shows the overall Australian securitisation market in 2010 recorded volumes less than half that experienced at the peak in 2006.

As a result, securitisation of mortgages has fallen away as a funding source for home lenders, leaving much of the market dominated by Australia’s big four banks, which obtain offshore wholesale funding for their home loans.

Standard & Poor’s has said it would not downgrade Genworth’s Australian operations because it was ring-fenced from its parent’s problems.

People in the Australian credit market view Genworth in Australia as operating under capital requirements imposed by the Australian Prudential Regulation Authority. As a result, Genworth in Australia has a better Moody’s credit rating than its US parent.