Residential mortgage-backed securities (RMBS) ratings would withstand any downgrade of the two lenders’ mortgage insurance (LMI) players, according to a Standard & Poor’s (S&P) report.

The ratings agency has considered the possible outcome of downgrading QBE LMI and Genworth Financial Mortgage Insurance from AA-/Negative-.

The report notes “deterioration in the financial strength of LMI insurers” could affect RMBS ratings issued by S&P.

However, the agency believes the impact would be higher on subordinated notes than on outstanding senior ranking notes.

“Not only do the latter notes usually have ratings that are higher than the financial strength ratings on relevant insurers but they also often have extra credit enhancement that provides a buffer for them to withstand certain levels of LMI provider downgrades.”

S&P notes the strong credit quality and claims payment records of QBE and Genworth have underpinned the stability of the prime RMBS ratings to date.

But both LMI insurers’ outlooks have been downgraded in recent months – to negative. 

Genworth faces a possible downgrade of its rating to A+ if it fails to undertake a partial sale of the Australian business next year.

In QBE LMI’s case, S&P says if its parent is downgraded it is unlikely to affect the specialist subsidiary.

If both LMI insurers were downgraded to A+, the agency believes it would affect fewer than 5% of AAA-rated notes.

But those below senior ranking notes would be more severely affected if no credit was given to LMI.