S&P to Approve Credit Risk Management Companies
Rating agency Standard & Poor's has started a program to evaluate entities that act as "credit risk managers" in the residential mortgage-backed securities market.
The criteria defines roles and responsibilities of an approved credit risk manager and the potential impact on MBS transactions.
During the past few years, these firms have entered the residential mortgage market to provide oversight of servicers and transactions for investors. As a result of their loan transaction due diligence and analysis, S&P has determined investors have avoided or reduced potential losses to their investments and recovered funds not property allocated including insurance premiums, prepayment penalties and misdirected cash flows.
The servicers provided by a credit risk manager include analysis of representation and warranties, mortgage insurance collection maintenance, prepayment penalty maintenance, waterfall oversight, report reconciliation, default management, servicer oversight and dispute arbitration.
The S&P review of a credit risk management firm focuses on the company's overview and organization, management background and experience, company policy and procedures manuals, credit risk management methodology, sample reports, information technology, audited financial statements, and business plan and projections.
An onsite visit to the firm is also conducted to review the operations of the credit risk manager. Areas of the review include management, credit risk management methodology, reporting processes, training, information technology and financials.
The Murray Hill Company, Denver, pioneered the credit risk management field and remains the most prominent firm providing this service, though other firms have entered the business as well.
Today, Murray Hill has over $700 billion of originated loans under management, company president Kevin Kannouff told Mortgage Servicing News.
He said that by recognizing the value that credit risk managers add to a deal, S&P's approval of firms in the business should help to reassure servicers about the professionalism and competence of the firms with which they will be working.
He said that credit risk managers can enhance communication and cooperation between the parties involved in servicing an MBS transaction and managing cash flows, including master servicers, special servicers, trustees and mortgage insurance firms.
"The best way to look at what a credit risk manager does is to think of us as a facilitator and overseer of all of the transaction fiduciaries," Mr. Kanouff said.
Susan Barnes of Standard & Poor's said that credit risk managers oversee the work done by special servicers or subservicers that actually perform the default management and loss mitigation functions. Often, they review cases on an exception basis to analyze the losses that are being passed on to investors in an MBS transaction.
"You can think of it as almost a quality control function," she said.
Ms. Barnes said that there is room for numerous players in the industry, and she said several companies have called S&P in response to the announcement that the rating agency will evaluate credit risk managers to express an interest seeking a review.
She said that perhaps a quarter to a third of private label MBS transactions currently have some firm providing credit risk management, and that figure may grow. She said investors are eager to have "another set of eyes" look at the losses that are passed through to them.
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