Are investors in mortgage-backeds putting their money where their mouth is?

Buysiders at a recent roundtable sponsored by Standard & Poor’s expressed a preference for a strong representation & warranty (R&W) framework in residential mortgage-backed securities (RMBS), according to the agency.

But they also acknowledged that, at least in regard to the R&W provider, differences in quality and strength have not translated into differences in deal pricings.

R&W refers to claims about the quality of a mortgage’s underwriting and the recourse an investor has if those claims were misrepresented.

S&P did not name the participants and grouped their responses by type: arranger, investor or due-diligence firm.

Investors said they placed a high value on the R&W provider and would like to see rating agencies consider the caliber of this participant when assessing a deal. S&P itself said that, indeed, financially weaker players showed themselves to be at higher risk of insolvency when the mortgage market unravels.

But this preference by investors has not been reflected in pricing. “Both arrangers and investors indicated that pricing differentials have had more to do with market conditions than with concern about R&W’s in general,” the agency said.

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