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ASF Releases Model Representations and Warranties to Bolster Risk Retention and Transparency in Mortgage Securitizations
Press Release
December 15, 2009
New York, NY, December 15, 2009—The American Securitization Forum (ASF) today released the final ASF Model Residential Mortgage-Backed Securities(RMBS) Representations and Warranties (Model Reps), designed to better align the incentives of mortgage originators with those of investors in mortgage loans and to significantly increase the transparency of representations and warranties by making them more easily comparable from transaction to transaction. The Model Reps represent the next phase of ASF Project RESTART, an industry-developed initiative launched 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 American consumers and small businesses.
“Securitization is a critical tool used by bank and finance companies 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 has been designed to improve the securitization process by developing commonly accepted and widely used standards for transparency, due diligence and risk retention. The Model Reps ensure that originators of mortgage loans will stand behind and retain appreciable risk inherent in the packages of loans sold to investors. They have been developed to better allocate risks between issuers and investors and to provide enhanced investor protections over what had been previously provided in ‘pre-crisis’ transactions.”
Representations and warranties are used to allocate the risk of defective mortgage loans among the 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 institutional investors, 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 100% of the value of defective mortgages. The Model Reps issued today include many new provisions which were not included in existing market representations and warranties, including the coverage of fraud by origination parties such as originators, borrowers, brokers and appraisers, the qualifications and independence of the person performing a property appraisal, and the requirement that originators employ reasonable processes to authenticate documentation and verify income for loans with less than full documentation.
"The principal goal of any risk retention initiative should be to reinforce commercial incentives for originators and securitizers to fund assets that conform to stated underwriting standards, thereby making those parties economically responsible for the stated attributes of the loans," said Ralph Daloisio, chairman of the ASF Board and a managing director with Natixis. "The ASF continues to believe that risk retention for issuers of RMBS is embodied best in having securitized loans subject to a clear and meaningful set of representations and warranties that is enforced by a workable system for detecting breaches and delivering remedies."
ASF Project RESTART has been acknowledged and encouraged by the President’s Working Group and IOSCO. In addition, the Administration, the Senate Banking Committee and the House Financial Services Committee have called for regulations on the use representations and warranties in securitization transactions, including determining how representations and warranties differ from transaction to transaction.
Links to documents:
• ASF Model RMBS Representations and Warranties:
• Restoring American Financial Stability Act of 2009 (See Title IX, Subtitle D):
http://banking.senate.gov/public/_files/AYO09D44_xml.pdf
• The Wall Street Reform and Consumer Protection Act (see Title I, Subtitle F):
http://docs.house.gov/rules/finserv/111_hr_finsrv.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 340 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.
Media Contact: Jason Farago, jfarago@americansecuritization.com, 212.313.1230