As the Treasury’s fourth-quarter 2010 report on the legacy PPIP program last week showed, private-label residential MBS have proven to be a vehicle in some circumstances for generating returns, so it might be worth keeping a cautious eye on the sector and regulatory developments like new rules for due diligence providers that could affect it.
Among the Securities and Exchange Commission’s “final” rules related to due diligence is an effort to hold providers to an “expert” opinion, an onus that in the past was said to have proved problematic when applied to rating agencies.
As Scott Buchta, head of investment strategy at Braver Stern Securities, noted recently: due diligence providers might not shut down the market and refuse to do business in the face of an “expert” requirement, but the additional legal and other steps needed are likely lead to additional costs for providers and fees for clients.
“Expert” status means due diligence providers can be held legally liable for their opinions, which would require an increased level of legal protection, insurance and cost, according to Sue Allon, CEO of due diligence provider Allonhill.
She told National Mortgage News she believes some minimum standards for providers—something regulators have delayed action on—could be more helpful to investors than “expert” status as they would provide a framework for what data should be provided and how it should be obtained.
In a case of income verification involving a high net-worth borrower, for example, where a W-2 tax form alone might not be sufficient, there might be a question of whether a one-time gain on sale of an asset should be included. “My firm would not include that,” Allon said, but she said it is possible another firm might.
“My firm has always intended to be held as an expert, but we can’t do it if we don’t have minimum standards,” she said.
Roadblocks to the minimum standards have included the concern that what might be appropriate for RMBS might not be appropriate for other types of asset-backed securities. Allon said that because she sees RMBS as more closely tied to larger financial concerns during the downturn than, say, credit cards or auto leases, she feels it is more appropriate to focus on RMBS alone.
Allon said to address concerns related to data integrity in the absence of minimum standards, her firm operates by putting in writing the types of data it will provide and its independent methods for obtaining them as well as its parameters for what is and is not acceptable. It also has clients and rating agencies agree to its terms and sign off on them.
Other news that might be of interest to PL RMBS investors is part of a recent Moody’s Investors Service resecuritization report that finds, while protections against bankruptcy risks might be strong on underlying bonds, resecuritizations’ protections against BK risk of their own sponsors might be not be of the same type or degree. This could give dealers an edge because they would be perceived as having more of a “true sale” distance from the collateral than, say, a portfolio lender, Buchta suggested in an interview. (Moody’s did not immediately respond to a request for additional comment on the issue.)
Also in regard to RMBS re-REMICs: it appears Standard & Poor's is still reviewing a slew of bonds (as reported late last year) in an effort to correct some assessments of timely interest payments. S&P had not returned a call about that review’s status at press time. A Fitch spokesman last week told NMN it is still only rating select prime re-REMICs. A DBRS RMBS representative did not return a call on its resecuritization/re-REMIC policies.
