A group of mortgage originators, issuers and investors is close to a consensus on a new process for enforcing representations and warranties on private-label securities.
The American Securitization Forum working group wants an independent party representing all classes of investors in residential mortgage-backed securities to initiate reviews of origination and servicing files to determine if there has been a material breach of R&W.
If the originator refuses to buy back a loan or indemnify the trust for losses, the independent reviewer can seek arbitration.
These reviews could be triggered by certain factors such as delinquencies or a "review event," according to Wells Fargo general counsel Larry Rubenstein.
The process for these reviews and the responsibilities of the independent reviewer would be spelled out in a paper on repurchase governance provisions for RMBS. It is part of ASF's "RESTART" initiative to get the private-label MBS marketing going gain.
Rubenstein hopes the paper will be issued soon for others to look at.
"I feel very strongly this will be a significant advance," Rubenstein said at an ASF meeting in Washington last week.
Redwood Trust is one of the few issuers to complete a private-label RMBS deal in the past two years. But it has decided to take a different approach to R&W enforcement.
Managing director William Moliski told the ASF attendees that Redwood acts as the credit risk manager on its jumbo securitizations.
"We will go after violations of representations and warranties in our deals," he said.
However, Redwood turns to the subordinated noteholder to decide whether a dispute should be taken to arbitration.
The subordinated investor is the "best" alternative in terms of alignment of interests or “skin in the game,” Moliski said. If Redwood loses the case, the subordinated debt holder "losses dollar-for-dollar cash on his bonds." If Redwood wins, "it is windfall for the AAA bondholders."
In addition, Redwood did not want to rely on a third party that is paid like a servicer and has no economic interest in the deal.
"If they win the arbitration they get paid the same amount as if they lose the arbitration," the managing director said.
