The American Securitization Forum (ASF) issued a request for comment (RFC) on its new Model RMBS Representations and Warranties, which is designed to enhance the alignment of incentives of mortgage originators with those of mortgage loans buyers.
The association also released the final ASF RMBS disclosure and reporting packages, which will considerably increase the transparency of RMBS to investors and credit rating agencies.
Along side each other, they represent the next phase of ASF Project RESTART, which started in Feb. 2008, to help rebuild investor confidence in MBS and ABS, restore capital flows to the securitization markets and, ultimately, make credit more affordable to all Americans.
“Securitization is an essential tool used by financial institutions to provide the capital required to finance global demand for mortgage, consumer and business credit," Tom Deutsch, deputy executive director of the ASF. "Restarting the securitization market is essential to economic recovery, yet the process of securitization requires significant changes to restore institutional investors’ willingness to commit capital to these markets. ASF Project RESTART is designed to improve the securitization process by developing commonly accepted and widely used standards for transparency, due diligence and risk retention."
He mentioned that the two components of the project issued today offer expanded disclosure to investors. It also ensures that originators of mortgage loans will retain appreciable risk inherent in packages of loans sold to investors.
Deutsch said together that these steps will offer buyers more critical data compared with what was previously available as well as shift some risk from the investor back to the mortgage originator. This causes investors to have more confidence in securitizations.
Representations and warranties are used to allocate the risk of defective mortgage loans among mortgage originators, issuers of securities and investors who purchase them. A defective mortgage loan can be “returned” to the issuer through a repurchase out of a securitization trust. Many market participants, such as investors and rating agencies, believe the reps and warranties in previous deals and their related repurchase provisions have not effectively aligned incentives of originators and investors to produce the highest quality loans.
According to a release from the ASF, it has addressed risk retention techniques in future securitization deals by enhancing and standardizing the reps and warranties as well as developing stronger repurchase obligation provisions allowing investors to enforce buybacks of defective mortgages. The RFC issued today includes a new provision that covers fraud by any party to the mortgage loan origination, including originators, borrowers, appraisers, etc., which was not previously a universal representation. These also cover the qualifications and independence of the person performing a property appraisal, as well as due diligence tests for income verification, employment and assets on loans with less than full documentation.
The final ASF RMBS disclosure and reporting package released today standardizes and expands existing issuer disclosure to investors and credit rating agencies, particularly specifically loan-level information. It will allow investors to more easily compare loans and transactions across all issuers and perform necessary and sufficient loan-level analysis to evaluate RMBS transactions on the basis of the features and performance of the underlying mortgage loans. The same loan-level detail will aid credit rating agency evaluations by enhancing the quality, consistency and comparability of the data relating to securitized assets based on which the rating agencies make qualitative judgments on the likelihood investors will receive principal and interest payments.
As part of its RMBS disclosure and reporting packages, the ASF also said that it is partnering with Standard & Poor’s Fixed-Income Risk Management Services (FIRMS), an analytics unit separate from S&P’s ratings business, to implement an industry-wide unique mortgage loan identification system and mortgage loan database.
By assigning an identification number to each loan at origination, investors, credit rating agencies as well as other market participants will be able to track the performance of each loan throughout its life. The loan identification would have information regarding the loan such as asset type, country code and origination date,offer a comprehensive repository for critical mortgage loan data for investors, credit rating agencies as well as regulators.