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The American Securitization Forum (ASF) today issued a request for comment (RFC) on its new Model Residential Mortgage-Backed Securities (RMBS) Representations and Warranties, designed to enhance the alignment of incentives of mortgage originators with those of investors in mortgage loans. The ASF also released the final ASF RMBS Disclosure and Reporting Packages, which will significantly increase the transparency of RMBS to investors and credit rating agencies. Together, they represent the next phase of ASF Project RESTART, an industry-developed initiative begun in February, 2008 to help rebuild investor confidence in mortgage and asset-backed securities, restore capital flows to the securitization markets and, ultimately, increase the availability of affordable credit to all Americans.
“Securitization is an essential tool used by financial institutions to provide the capital required to finance global demand for mortgage, consumer and business credit. Restarting the securitization market is essential to economic recovery, yet the process of securitization requires significant changes to restore institutional investors’ willingness to commit capital to these markets,” said Tom Deutsch, deputy executive director of the American Securitization Forum. “ASF Project RESTART is designed to improve the securitization process by developing commonly accepted and widely used standards for transparency, due diligence and risk retention. The two components of the Project issued today offer expanded disclosure to investors, as well as assurances that originators of mortgage loans will stand behind and retain appreciable risk inherent in packages of loans sold to investors. Taken together, these steps will offer investors more critical data than previously available and shift some risk from the investor back to the mortgage originator, thus offering investors more confidence in securitization transactions.”
Representations and warranties are used to allocate the risk of defective mortgage loans among mortgage originators, issuers of securities and investors who purchase them. Much like a defective product is returned to the store from which it was sold, a defective mortgage loan can be “returned” to the issuer through a repurchase out of a securitization trust. Many market participants, including investors and rating agencies, believe that the representations and warranties in previous transactions and their related repurchase provisions have not effectively aligned incentives of originators and investors to produce the highest quality loans.
The ASF has sought to address risk retention techniques in future securitization transactions by enhancing and standardizing the representations and warranties as well as developing stronger repurchase obligation provisions that allow investors to enforce buybacks of defective mortgages. The RFC issued today includes a new provision covering fraud by any party to the mortgage loan origination (originators, borrowers, appraisers, etc.), which was not previously a universal representation. They also cover the qualifications and independence of the person performing a property appraisal, and due diligence tests for verification of income, employment and assets on loans with less than full documentation.
The final ASF RMBS Disclosure and Reporting Package released today standardizes and expands existing issuer disclosure to investors and credit rating agencies, particularly on mortgage loan-level information. It will enable investors to more easily compare loans and transactions across all issuers and perform necessary and sufficient loan-level analysis to evaluate RMBS transactions on the basis of the features and performance of the underlying mortgage loans. The same loan-level detail will aid credit rating agency evaluations by enhancing the quality, consistency and comparability of information relating to securitized assets upon which the agencies make qualitative judgments of the likelihood that investors will receive promised payments of principal and interest in accordance with the terms of the securities.
As part of its RMBS Disclosure and Reporting Packages, ASF also announced today that it is partnering with Standard & Poor’s Fixed Income Risk Management Services (FIRMS), an analytics unit separate from Standard & Poor’s ratings business, to implement an industry-wide unique mortgage loan identification system and mortgage loan database. By assigning an identification number to each loan at origination, investors, credit rating agencies and other market participants will be able to track the performance of each loan throughout its life. The loan identification would include information about the loan such as asset type, country code and origination date, while ensuring compliance with federal privacy laws. The mortgage loan database will pro-vide a comprehensive repository for critical mortgage loan data for investors, credit rating agencies and regulators.
ASF Project RESTART has been acknowledged and encouraged by the President’s Working Group and IOSCO. In addition, the Obama Administration indicated the need for these initiatives in its June 17, 2009 regulatory reform proposals, which discuss strong, standardized representations and warranties, and also call for improved and standardized disclosure practices for securitization transactions.
Comments on the ASF Model RMBS Representations and Warranties are due by September 4, 2009.
Links to documents:
• ASF Model RMBS Representations and Warranties Request For Comment: http://www.americansecuritization.com/uploadedFiles/ASF_RESTART_Representations_RFC_071509.pdf
• ASF RMBS Disclosure and Reporting Packages: http://www.americansecuritization.com/uploadedFiles/ASF_Project_RESTART_Final_Release_7_15_09.pdf
• Financial Regulatory Reform proposals – June 17, 2009: (see page 45): http://www.financialstability.gov/docs/regs/FinalReport_web.pdf
The American Securitization Forum is a broad-based professional forum through which participants in the U.S. securitization market advocate their common interests on important legal, regulatory and market practice issues. ASF members include over 350 firms, including issuers, investors, servicers, financial intermediaries, rating agencies, financial guarantors, legal and accounting firms, and other professional organizations involved in securitization transactions. The ASF also provides information, education and training on a range of securitization market issues and topics through industry conferences, seminars and similar initiatives. For more information about ASF, its members and activities, please go to www.americansecuritization.com. The ASF is an independent affiliate of the Securities Industry and Financial Markets Association.
