Fitch Ratings believes that the market disruption caused by mortgages that fail to comply with a new consumer disclosure rules is out of proportion to amount of risk posed to mortgage bond investors.
The "Know Before You Owe" rule, commonly known as TRID, took effect in October and was meant to help consumers understand the total costs of a home loan. But the number of variables to account for on the forms makes compliance extremely difficult, and many investors are refusing to purchase loans without further guidance from the Consumer Financial Protection Bureau.
Fitch believes that his level of concern is unwarranted.
In a report published Monday, the rating agency said that investors will likely only be exposed to maximum statutory damages of $4,000 plus attorney’s fees. It noted that there could be consumer claims in defense of foreclosure in states where foreclosure must be approved by a court. However it is less likely that compliance failure will result in such claims in non-judicial states.
What’s more, it should soon be much easier to resolve TRID errors on mortgages that have been securitized. An industry working group that includes issuers, attorneys and firms that provide third party reviews of loans has provided Fitch and other rating agencies with a draft proposal for the due diligence grading of the issues. The draft proposal, which was coordinated by the Structured Finance Industry Group, “represents a significant step forward for developing an industry standard treatment of errors related to the new residential mortgage disclosure requirements,” Fitch stated in its report.
The document is expected to be finalized over the next few weeks.
Fitch and others have concluded that many compliance issues, at least among the prime jumbo loans backing most bonds, appear to be good faith errors. It is merely the ambiguity in the rule and a lack of judicial precedent has caused uncertainty on how to assess the materiality of the errors and how to resolve them.
The rating agency feels that the current proposal addresses the rule’s ambiguous areas in a “reasonable manner.” Namely, it gives consideration to the CFPB’s informal guidance and also gives consideration to good faith attempts to resolve issues that do not have cures explicitly defined in the rule.
In the meantime, Fitch expects that few unresolved TRID errors that are likely to be eligible for damages will remain in securitized mortgage pools. And to the extent that they are present, investors will benefit from modestly higher credit enhancement to help mitigate the risk.
“Additionally, for transactions with sufficient representations and warranties frameworks, RMBS investors will also potentially benefit from the representations by the issuer intended to protect them from losses related to compliance issues,” the report states.