Securitisations backed by loans originated under alternative lending models (ALMs) face heightened risks for investors, Moody’s has warned.
Analysis by the credit ratings agency warned there can be a misalignment of interests between various transaction parties.
Unlike in mainstream financial services, Moody’s warns, alternative lenders often have different people funding, assessing and underwriting a loan.
It warned that securitisation investors can be exposed to the misalignment of different interests.
“Noteholders in securitisations backed by collateral originated under ALMs have exposure to misalignment of interests because some model participants may retain skin in the game while others do not,” Moody’s said.
“Skin in the game can refer to risk alignment with the securitisation, or more broadly, the extent of the model operator’s business alignment to the credit performance of originated loans.
“If there is no or limited skin in the game, underwriters have the incentive to focus on loan quantity at the cost of quality, increasing losses among alternative lending securitisations.”
The analysis added that these risks can be mitigated through strong lending track records and loan regulation.
Moody’s also points out that sponsors of securitisations often still have to manage the risk of the underlying loans.
It comes as Moody’s separately published a pre-sale package ahead of a securitisation of a portfolio of Funding Circle’s US loans.