DBRS late Monday provided its take on recent representation and warranties trends in residential mortgage-backed securities it finds have “the potential to considerably weaken investors’ ability to demand a repurchase.”
Analysts at the company said in a report, “Until recently, RMBS securitizations issued since 2010 have generally had more positive R&W features such as specific procedures to put forth a claim, automatic review of breaches and strong enforcement mechanisms including the use of arbitration to settle. However more recently, DBRS has evaluated various R&W proposals that represent a meaningful departure from the post crisis R&W standard.
“One common theme of many of the new proposals is their attempt to specify a definitive time period for certain R&W, typically those related to underwriting and fraud, before the representing parties’ (often the originators) repurchase obligation expires, or sunsets. Other new features proposed include carving out life events when determining an R&W violation (proximate cause), or the lack of or reduced backstop by a financially stronger entity than the originators themselves.”
The company said such concerns led it to decline to rate transactions in “two recent instances.” It also noted, “In many cases when evaluating securitizations containing some of the new R&W features, DBRS has assigned additional penalties, hence increased loss expectations, to account for such potential risk” such as it did in
