The American Securitization Forum (ASF) today released the final version of the ASF Model RMBS Representations and Warranties.
The development of the Model Reps represents an important phase of ASF's Project on Residential Securitization Transparency and Reporting (ASF Project RESTART), an initiative launched in February 2008 aimed at restoring investor confidence in ABS and MBS.
Representations and warranties are used to allocate the risk of defective mortgage loans among the mortgage originators, issuers of securities and investors who purchase them. Much like a defective product is returned to the store from which it was sold, a defective mortgage loan can be “returned” to the issuer through a repurchase out of a securitization trust. Many market participants, including institutional investors, believe that the representations and warranties in previous transactions and their related repurchase provisions have not effectively aligned incentives of originators and investors to produce the highest quality loans.
The Model Reps, which are aimed at providing substantial enhancements to the traditional representations and warranties offered in RMBS deals, were developed by a broad-based working group consisting of issuers, originators, credit rating agencies, financial guarantors, primary mortgage insurance companies and institutional investors.
The ASF has sought to address risk retention techniques in future securitization transactions by enhancing and standardizing the representations and warranties as well as developing stronger repurchase obligation provisions that allow investors to enforce buybacks of 100% of the value of defective mortgages. The Model Reps issued today include many new provisions which were not included in existing market representations and warranties, including the coverage of fraud by origination parties such as originators, borrowers, brokers and appraisers, the qualifications and independence of the person performing a property appraisal, and the requirement that originators employ reasonable processes to authenticate documentation and verify income for loans with less than full documentation.
"The principal goal of any risk retention initiative should be to reinforce commercial incentives for originators and securitizers to fund assets that conform to stated underwriting standards, thereby making those parties economically responsible for the stated attributes of the loans," said Ralph Daloisio, chairman of the ASF Board and a managing director with Natixis. "The ASF continues to believe that risk retention for issuers of RMBS is embodied best in having securitized loans subject to a clear and meaningful set of representations and warranties that is enforced by a workable system for detecting breaches and delivering remedies."