Thanks to a recent turn of events, what was just six years ago a start-up by the Murrayhill Co. is now poised to be a burgeoning industry within securitization.

The Colorado-based credit risk manager has picked up considerable buzz since joining panel discussions at ABS West. One, concerning the gray areas of bond balance restatements, drew some notable exchanges, sources report.

Now comes word that Standard & Poor's announced it is in the process of reviewing credit risk advisor roles and responsibilities and its impact on U.S. RMBS deals. If found favorable, the S&P reviews could lead to better ratings for RBMS deals that contain a credit risk manager.

"It's very positive. The action they are proposing is something I've worked on the last six and a half years," said Murrayhill CEO Sue Ellis.

By providing transaction for U.S. RMBS, Murrayhill helps investors avoid potential losses.

This fact has caught the eye of at least one rating agency as S&P is looking into report reconciliation, funds flow management, loan level administration, servicer oversight and transaction oversight. The agency said all credit risk advisors are encouraged to participate in the study.

BPS blip

Informally, Murrayhill has periodically presented results to all three rating agencies of internal studies that quantified results from all transactions under its purview.

For the study's most recent installment, tracking February 2000 to mid-December 2003, Murrayhill found its oversight brought a typical range of a minimum of 5 basis points to a maximum of 30 basis points back to each deal under its purview.

"It's provable, quantifiable dollars brought back that the investor otherwise wouldn't have had," said Ellis "This is the value we're adding."

Such results essentially beg the question - should rating agencies be giving transactions better enhancement levels if a credit risk manager is present? Or vice versa: should deals without credit risk managers have less favorable levels?

A rating process, should it come to fruition, would essentially put a stamp of approval on the concept of value behind having a credit risk manager on a deal. That, of course, means more competitors for Murrayhill.

"This is a year when we're going to see competition and we think competition is good. It's a validation that the market we created is real," said Ellis. And as demand for the product grows, Ellis is confident her company will handle the growth with poise.

Duking it out over solutions

Conversations coming off the panel at ABS West dedicated to industry standards for fiduciaries yielded one strong topic that was left unresolved - subsequent proceeds on loans liquidated.

Raised by rating agencies, the liquidation topic is one of the largest concerns currently circulating the market. The panel discussed a hypothetical situation under debate by players in the RMBS market.

A loan in a $1 million RMBS bond defaults, closes, is liquidated and results in a loss. That loss usually goes to the first loss holder, the lowest rated bond in the RMBS vehicle. The note holder now has an overall reduced principal on which to earn interest and is certainly not happy. As the hypothetical situation goes, say that loan was $100,000 and defaulted, in part, because the underlying property is destroyed. Three years later an insurance company distributes a check tied to the loss of that property, worth $100,000 - who gets it? Is it paid as cash to the first loss bond holder? Or should the bond balance be restored so instead of $900,000 it goes back up to $1 million?

The industry, of course, thinks the bond balance should be reinstated, said Ellis, who was the panel moderator. But not everything is so clear-cut.

What happens if the bond balance went away and three years had passed, making it difficult to determine who owned the bond at the time of the loss? Who would get the $100,000 if it were reinstated? Applying it to the single-B holder is still unfair to the first loss holder who took the hit, explained Ellis.

When bond balances are reinstated, it is a costly process to all parties involved. Every month that passed on that deal each investor was, essentially, paid the incorrect amount. Restating those bond classes creates tax consequences, Ellis points out. And there are materiality issues still unresolved. What if that check from the insurance company was for $5? Does the reinstatement process still make sense?

"It's a costly process and a fairly manual process. Do you make such a big deal if its $5? No trustees' systems are really built for this," said Ellis.

No absolute answer was offered. Some panelists felt that striving for perfection is what the industry incorporates and that all investors should be treated equally. And if reinstatement is done for one investor in a situation, it should be done for all investors in all situations, regardless of the size of the adjustment.

Due to the cost, Ellis stated the impact on the investor may need to be thought through better. "Would an investor want to deal with the tax consequences of a $5 restatement?" she asked.

Currently most deal documents do not say what to do with the proceeds. On the other hand, according to Ellis, about one third of deal documents state the cash goes back to the loss while others call for restoring bond balances.

In the end, the panel left it up to further debate. It remains to be seen where timing and materiality are concerned, although all panelists agreed that whatever the deal documents say must be adhered to.

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