It may not be cost effective for a third party to monitor the quality of collateral in prime jumbo residential mortgage bonds, but they may have a role to play in deals backed by riskier loans.
Clayton Holdings said Monday that it had been selected by Angel Oak Capital Advisors to be the representation-and-warranty reviewer for a $150.4 million private-label securitization of nonprime loans.
The transaction, which was closed in December, is comprised of 555 nonprime whole loans originated by two of Angel Oak Capital's affiliate companies: Angel Oak Mortgage Solutions and Angel Oak Home Loans.
Clayton will provide an independent review of certain loans based on triggers defined within the transaction documents. In the event that a loan becomes seriously delinquent or is liquidated with a realized loss, Clayton will complete a set of tests designed to determine whether the loan complied with the representations and warranties made about the loans to the trust and whether any observed test failure represents a material breach.
Following Clayton's reporting of a material breach, the trustee could then request repurchase or other remedy from the representation provider.
"We selected Clayton for this role based on the company's extensive experience in loan reviews and private-label securitization," said John Hsu, head of capital markets at Angel Oak.
It's not clear how risky the loans are, but the role appears to be somewhat narrower than the "transaction manager" role that was being widely discussed at this time last year. In a report published in June 2015, Fitch Ratings said a transaction manager would be responsible for coordinating with all other transaction parties, including servicers, trustees, custodians, specialty vendors and investors. It would have the ability to replace underperforming servicers, which would heighten servicer accountability and mitigate losses on distressed loans.
In the report, Fitch concluded that it probably wasn't cost effective to have someone in this role on deals backed by high-quality loans, at least in a benign credit environment. And to date, not a single sponsor of prime jumbo deals has hired one. However, several recent securitizations of loans that were once delinquent but are now current have had third parties play a role similar to Clayton's.
"One of the headwinds that has slowed the return of nonprime private-label securitization has been a concern over whether the trustee adequately represents the interests of the investors over the life of the deal," said Mark Hughes, executive vice president at Clayton, in the press release. "By formally naming a representation and warranty reviewer, Angel Oak has proactively addressed this concern. Going forward, we expect this kind of function to be included in other nonprime securitizations."