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.
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.