Securitization structures have widely been known to be a longstanding roadblock when it comes to working out the mass of problem loans originated between 2005 and 2008 — but that is starting to change, according to Jeffrey Taylor, managing director at Digital Risk.

Taylor said the market is getting to the point where it is more comfortable with the legal rights of investors as well as the representations and warranties in securitizations, something the market had previously been unfamiliar with doing on the kind of scale it had to in the wake of the downturn.

Removing this roadblock is a key step in the process of working out the vast amount of nonperforming and subperforming nonagency mortgage-backed securities loans from private label deals issued between 2005 and 2008, he told this publication at the Mortgage Bankers Association's recent National Secondary Market Conference.

"It's been very recent that we've seen securitized whole loans [of this type] move," confirmed Sylvia Alayon, vice president of Capital Markets Assessment Corp., a recently formed company that aims to provide third-party, neutral assessments of these mortgage assets and others for business buyers and sellers in the market. "We foresee this will be a big market for us."

However, she told this publication there are some risks to that forecast, indicating the present level of interest is on the order of putting one's toe in the water to see what the temperature is.
"You don't see a lot of people jumping in yet," Alayon said. But, "if this does prove to be a viable business model then everybody [in the private sector] will be jumping in," she said.

Alayon said in six months there could be a better sense of whether the trend will intensify, as it will take about that long for buyers who plan to work out the loans to position them for that process and have a sense for how it might proceed.

After that it will take probably another 12 months to see how they will perform, she said.
"Obviously a portion of the portfolio's not going to be 'turned around,' but there is a portion that will," Alayon added.

For the private investor, she said, "there is a real opportunity they perceive in converting this."
She cited figures released last year that have shown that about 30% of loans from the problematic vintages have some kind of flawed information behind them, something she largely attributes to the speed and volume at which they were originated during those years.
When asked about the potential complexities involved in securitization structures such as the limits placed on servicers by the transactions' documents and potential conflicts between investor classes, she noted that these are still risks.

But investors in an increasing number of cases perceive that the discount prices for this securitized product are low enough to make it compelling.

Alayon said the recent investor appetites for these securitized loans have varied ranging from conservative interest limited to 30-year product with 80% loan-to-value ratios to "scratch and dent" product such as alternative-A/subprime credit and "sand state" loans.

Ultimately, Taylor believes the process of working out loans from problematic vintages is one that is likely to continue through 2012 and is likely to end with a massive settlement similar to that seen in the tobacco industry.

Mortgage investors have been forming coalitions to address concerns, he said.

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