Even though third-party due diligence has always been performed on whole loans, the providers of these services have more skin-in-the-game now that rating agencies have very stringent requirements.
“The certification process that we undergo now and the minimum standard of review didn’t really exist before,” said Charlie Cacici, a managing member at RMG, which is a company that provides third-party RMBS due diligence services. “This is a way of luring back investors to RMBS transactions.”
New York-based RMG has just been approved by DBRS to provide third-party loan level reviews for RMBS, both pre and post-securitization, for deals that the agency rates.
RMG also meets the third-party review provider requirements of Moody’s Investors Service and Fitch Ratings, and is currently awaiting approval by Standard & Poor’s.
The company is also currently working with Kroll Bond Ratings to determine what the agency’s requirements are.
Bill Twombly, a managing director at RMG, said that part of the rating agency certification process looks at the third-party vendor’s quality of expertise, which includes evaluating a firm’s operational process and procedures, hiring and training practices in addition to the experience requirements in place.
“As a company, we adapt to the ever-changing environment,” Twombly said. “We’re excited about our opportunities in dealing with the rating agencies and meeting our clients’ needs.”
There are also regulatory requirements that affect third-party review firms. Cacici explained that previously there was no recourse for investors in terms of third-party due diligence companies. However, because of Dodd-Frank Act requirements, “this is coming and it creates accountability. That’s a big key in the industry. This gives the incentive to put our money where our mouth is.”
Cacici said that RMG has been active in the repurchase business. Their review of loans has shown that 90%, or even 95%, of the loans that they have done forensic reviews on have had material fails, although this is limited to loans originated in 2004, 2005 and 2006 that RMG looked at.
RMG started providing due diligence services to the mortgage market in 2005, and the firm has since been hired to offer such services to clients that comprise government agencies, bond insurers, institutional investors and originators.