Credit Suisse has made substantial changes to its non-agency RMBS program to address rep and warranty issues behind so much controversy and litigation in legacy deals, according to Standard & Poor’s.
What distinguishes the bank’s third offering of the year, the $329.9 million CSMC Trust 2012-CIM3 (CIM3), according to S&P, is that it sets limits, also known as “sunset provisions,” on the amount of time investors in the deal have to make claims that loans used as collateral do not meet stated underwriting criteria.
Additionally, the latest deal contains language intended to clarify what constitutes a breach of representations and warranties of the underwriting criteria.
Since the financial crisis, banks have been pushed by investors to buy back billions of dollars of delinquent mortgages from pools backing private label RMBS. S&P said the CIM3 transaction is the first of what it expects will be many non-agency examples of the effort to provide greater clarity around the issues.
"The RMBS market has attempted to balance the interests of investors and issuers while providing clear guidelines to all participants involved in the securitization process," the agency said in its report.
"We believe that traditional [rep and warranty] provisions merit attention to provide greater clarity on re-purchase responsibilities, encourage greater due diligence in the origination and securitization processes, and reduce litigation and related expenses for all market participants in the long term.”
A separate report by S&P rating the deal noted that the representations and warranties provided by each originator are backstopped by DLJ, the seller. S&P assigned the top three tranches a triple-A rating.
S&P noted that the Federal Housing Finance Agency (FHFA) recognizes both the need to offer the market certainty about the transfer of risk to the private market as well as the negative effect the GSEs' own repurchase demands can have in that process. On Sept. 11, the FHFA along with Fannie Mae and Freddie Mac, announced changes to the agencies' rep and warranty framework for conventional single-family loans. The effort is designed to make it easier for lenders to understand when they are obliged to repurchase eligible loans. The changes are also intended to boost the quality of the GSEs' portfolios by moving the quality control review earlier on the process.
According to the FHFA and the GSEs, subject to added eligibility and exclusion parameters seeking to target traditionally underwritten performing loans, for loans sold or delivered to the GSEs after 2012, the GSEs will not make repurchase claims from investors following three years from such sale or delivery date. That compares with a one-year limit for some government-eligible refinance programs.
S&P thinks that the FHFA's efforts can benefit the non-agency market as well. CIM3’s sunset provisions are not as broad as the GSEs' measures as they are limited to a three-year sunset period for fraud claims and non-compliance with underwriting guidelines. But, they do add some certainty to loan originators and issuers that there will be no attempts to subject them to what has been an open-ended put option in the future when life events, rather than non-compliance with the selected rep and warranties, are the likely cause of default or loss.
S&P recognizes that there is the possibility that claims for legitimate breaches will be barred after the applicable sunset period. But, analysts view the likelihood of such claims, based on breaches that have actually been the primary cause of a default or an excessive loss after three years from the sale date, to be remote in the CIM3 deal.
The agency said that the deal's sunset provisions are not a negative credit factor, which is based on its assessment of the collateral. Analysts said that the prime collateral in the CIM3 offering, as with other prime jumbo 2011 and 2012 issuance, are of exceptionally high credit quality by historical standards. More signficantly, they have been subject to a 100% due diligence review by providers that S&P has reviewed. Since there are different origination and due diligence standards, the agency's view on the sunset provisions' effect will be based on their opinion of the likelihood of future rep and warranty breach claims.
The second major change in the CIM3 deal is the inclusion intended to clarify the "material and adverse" repurchase standard that has been the subject of litigation. The provisions' apparent purpose in some of CIM3's repurchase agreements is to lessen the repurchase obligation to situations when the associated breaches either caused a default or increase a loss as a due to default.
It is not clear whether these provisions will significantly impact future re-purchase disputes considering how hard it is to establish proximate cause, analysts said. However, they think the provisions offer more clarity versus traditional language. Analysts agree with general market consensus that risk for life events, including unemployment, included in the provisions should "properly be a risk that investors bear, while deficiencies in loan origination and underwriting should be borne by originators and issuers."