As developments like the Federal Reserve Bank of New York’s plan to gradually and competitively sell nonagency RMBS from the “bailout” period into an improved market suggest, it looks like we’re starting to put the recent downturn behind us in some respects.

However, given that at the same time the market is continuing to work through challenges when it comes to developing a reformed regulatory framework for new private-label (PL) RMBS as well as various outstanding business matters involving some of the old PL RMBS bonds, it also looks like we still won’t be able to forget the latter’s troubled past for awhile.

It could be two to three years before all the litigation plays out, according to David Lehman.
Lehman, a former WaMu Capital Corp. PL RMBS trader, is providing valuation insight pertinent to legal cases and transactions involving securities market conditions from the days when he traded the bonds.

“A lot of the lawsuits actually deal with a very specific point in time. Most of the time it’s during the credit crisis, so mid-to-late 2007 to 2008,” said Lehman, president of Clayton Holdings’ new subsidiary Asset-Backed Solutions.

Lehman said that the interesting thing there is, when one goes back to value a bond from 2008, there are a lot of things into account. First of all, one has to pretend to know nothing that happened after the fact

“You have to put yourself in the seat of a trader, for instance, at that point in time in 2008 and pretend [you don’t know] what happened," he said in an interview. "You have to use tools and research, etc., that was available to you at that time. So you can’t use anything that was created after the fact. You also have to understand what the market sentiment was at the time. You have to understand the thoughts and assumptions that people were using in the models at that time.”

The need to recreate and remember the past in this respect for this purpose for some market participants and clients exists to the extent that Clayton felt it important to have a separately branded subsidiary to handle the business niche that was aligned with its expertise in the RMBS and other structured product areas from that era, Clayton CEO Paul Bossidy said.

Lehman, who is working with fellow former WMCC trader Florin Nedelciuc and fellow structured product litigation support provider Tyler Simpson on the new ABS effort, said he expects their work focused on the PL RMBS markets’ past will eventually give way to those markets’ new form in the future.

As far as how recent risk retention regulatory development could shape that future, Lehman said he could only say generally that he believes Clayton could have a role to play in terms of “figuring out some of these conflicts of interest that people perceived before the credit crisis” and helping investors understand issues that “they’re dealing with right now so that they will be more comfortable in the future getting back into securitizations.”

When asked if he had a sense of when that might happen, Lehman said, “I wish I did at this point. I thought a while ago that we would have seen something by now.

“We’re seeing some bond funds, etc., being put together, but I think that we’ve got a long way to go before we get the institutional investors interested again and rates go up high enough that securitization makes sense to do,” he said.

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