A report from ratings agency Moody's Investors Service has expanded on an earlier report which compared the residential mortgage-backed securities (RMBS) markets for Australia, Japan, the Netherlands and the UK. The authors said there is a "clear diversity" in the levels of credit and operational risk in each of these four jurisdictions, which are among the largest RMBS markets outside the US.For example, while Japanese and Dutch collateral profile risk is lower than in Australia and the UK, Dutch mortgages were assessed as having higher operational risks than those in the Australian market. Japanese portfolios contain only owner-occupied, full-documentation mortgage loans that are made mostly to full-time employees of medium-sized or large corporations. The lending criteria of the large banks focus less on loan to value and more on an applicant's occupation and income sustainability.Australian prime RMBS portfolios consist of a much broader range of loan characteristics than those of the other markets, the Moody's report noted. These collateral pools can contain owner-occupied and investment loans to either full-time employees or self-employed borrowers, full documentation mortgages and low documentation loans, and loans with short-term fixed and variable rates.Another observation by Moody's was that in both Australia and Japan mortgages are not subject to risk-based pricing. "All borrowers pay the same rate of interest regardless of loan to value (LTV), loan amount or occupancy type," according to the report's authors. In contrast, the use of risk-based pricing by lenders in the UK is widespread and is determined by LTV as well as other risk characteristics, such as whether the loan is backed by an investment property.Moody's report also points out that credit risks are mitigated in Australian and Dutch RMBS deals because of lender's mortgage insurance (LMI).Most Australian RMBS loans have LMI, and the two largest LMI providers are private companies rated Aa3 and A1, respectively. In the Netherlands, NHG Guarantee, backed by an Aaa-rated government-sponsored entity, provides LMI to loans meeting certain criteria."However, the NHG guarantee amortises on a 30-year repayment basis and does not match the actual amortisation profile of interest-only loans, creating a coverage gap for such loans that increases over time," said Arthur Karabatsos, vice president and senior analyst in Moody's Sydney office.