Sandwiched between the brave new world of securitized assets and recording boatloads of revenue on the balance sheet is that dimly lit and somewhat pesky area known as oversight. One of the fixed-income market's first firms to burrow in and shed some light into this zone now has a new president - a sign that growth is occurring in credit risk management.
The Murrayhill Company named Kevin Kanouff its new president last week, and founder Sue Ellis, the former president and current CEO, shifted firmly into high gear as the chief executive.
Kanouff, a securities attorney by trade, had worked as counsel for nearly four years at Dorsy & Whitney LLP, where he was in its corporates and securities groups, before departing from the firm to take the position at Murrayhill.
"I came over after representing this client for several years; they had become more than a client, I felt personally invested in Murrayhill. When they asked, I saw this as a great opportunity to learn from great businesspeople and to move forward in a new direction," said Kanouff. "But this allows me to keep up with skills in the securitization area, so it's a great fit."
Serving the fixed-income industry, The Murrayhill Company, founded in July 1997, provides transaction and servicer oversight reporting on non-agency MBS and ABS securities, including credit cards, auto loans, equipment leases and "anything you'd see in a mixed product CDO," Ellis said. However, the firm is not contracted by servicers or trustees, but by underwriters and investors. "A dealer, when pooling a security together, will identify a servicer, a master servicer and a trustee to be the fiduciaries of that transaction, for the life of the transaction," she explained. "Now they also retain Murrayhill as a transaction overseer." Also known as a loss mitigation advisor or credit risk management, "our job for the life of that security is to monitor the performance of other fiduciaries."
Servicers and trustees have been a hotly contested topic for quite sometime in terms of how far they should be going in monitoring transactions, and if they're fairly compensated. While the initial intent for these firms was, essentially, complete oversight, Ellis pointed out the deal incentive was removed from those two parties. Now, should a loss occur on those securities, neither party suffers.
"I used to be with an investor and our feeling was there was a gap between the information provided to the investor and also a gap between the incentive," said Ellis, formerly a vice president at Asset Investors Corp. before founding Murrayhill. "We have a consulting group that benchmarks our servicers and we have a proprietary product called Baseliner that charts how servicers compare [to peers]."
In the wake of corporate malfeasance, i.e. Enron Corp., and closer to home, NCFE, a firm such as Murrayhill faces a changed environment, perhaps ripe for opportunity.
It used to be that Murrayhill would just look to see if the servicer was bringing the best value to the investor in their default management of a loan, and if the money was getting into the hands of the right security holders. "Now we're saying that's all well and good but if the servicer should shut down because they're not being responsive to borrower problems, than that doesn't matter," Ellis explained.
The firm has shifted focus dramatically toward compliance, making sure securities are managed by a servicer who is meeting compliance requirements in dealing with borrowers and issuers, she said. The firm will be influential in alerting people that a servicer needs to be replaced, will have some influence over the replacement and will aid in facilitating that transfer, said Ellis.
"In fact, until compliance emerged this year as one of the biggest problems, the largest one we were encountering day to day was servicing transfers," Ellis said. "A transfer to a backup servicer is something we are absolutely expert in."
The firm has incorporated the SEC's best-practice checklist into its operating procedures, noted Kanouff, and its operations department provides monthly reports to the trustees based on those guidelines. Investors have noted specifically they are interested in having affirmative assurance that there is a backup servicer involved in a transaction, another effort Murrayhill will look to undertake, he said.
As fixed income continues to expand, servicer/trustee issues come to the forefront, and Murrayhill grows to nearly 100 employees (from its initial 30), undoubtedly competition will spring up in this emerging sector.
"Until very recently, we were the only credit risk manager in this space," said Ellis. "But we do have competition emerging now and that's a wonderful endorsement of our product."
"Imitation is the best form of flattery," said Kanouff.
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