DBRS said in a report today that it declined to rate two RMBS transactions this year because of weaker representations and warranties (R&W) framework proposals in these recent securitizations.
The ratings agency did not name the deal. However DBRS did rate both the JP Morgan Chase Bank
DBRS said that RMBS securitizations issued since 2010 have generally had more positive R&W features such as specific procedures to put forth a claim, automatic review of breaches and strong enforcement mechanisms including the use of arbitration to settle disputes. These 2013 RMBS deals have veered away from the post-crisis R&W standard.
Most troubling are provisions that implement a definitive time period for R&W, related to underwriting and fraud, before the representing parties’ (often the originators) repurchase obligation expires, or sunsets.
Other new features proposed include carving out life events when determining an R&W violation (“proximate cause”), or the lack of or reduced backstop by a financially stronger entity than the originators themselves, explained DBRS.
DBRS said that the newer R&W features “considerably weaken” the investors ability to demand a repurchase; and the deals should be subjected to additional penalties and increased loss expectations, to account for such potential risk.
