TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/145103
Feature Calculating Risk If you carefully analyze certain securitizations and transactions, you can help ensure risk doesn't rule your company's modus operandi. By Conrad Vasquez, EVP of Clayton Holdings I t's safe to say that our industry's appetite for risk is at or near an all-time low. Gone are the dubious products and practices of the past and the misguided notion that housing prices can only go up. As an industry, we're originating very high-quality assets, securitizing only the best of the best, and trying to operate in a zerotolerance regulatory environment. So why is there so much discussion surrounding risk? Perhaps because risk is inevitable, especially in an industry where so much is happening on the compliance and regulatory front, and where new players and opportunities are beginning to appear. A close examination of new securitizations and mortgage servicing rights transactions will offer solutions to reduce risk in two areas. Adding Ongoing Transparency into Private-Label RMBS E stimates are that privatelabel, non-agency securitization could grow to $20 billion or more this year. If guarantee (g-fees) and housing prices keep rising and interest rates stay low, then that number will continue to climb in the years to come, as yield-hungry investors get comfortable with the market again. 20 | The M Report The recent deals that have come to market have been comprised of extremely high-quality assets: FICO scores have typically been in the high 700s and loan-to-values in the 65 to 70 percent range. To improve the economics of private-label deals, there will be pressure to reduce the due diligence sample and relax other safeguards. It won't happen overnight, and no one is suggesting that quality and oversight will revert back to subprime-era standards. However, little by little, the assets and the deals will get riskier, and, at some point in a bond's lifecycle, loans will naturally begin to default. When defaults begin to occur again, investors won't have the full picture until it's too late. There needs to be an ongoing review mechanism to ensure that the underlying assets are serviced appropriately and that associated risk is mitigated. Without an When defaults begin to occur again, investors won't have the full picture until it's too late. Today, the percentage of loans being re-underwritten as part of the due diligence process is often 100 percent. No wonder of the more than a dozen deals one issuer has brought to market, only two loans have been classified as non-performing and both have cured. But inevitably, over time, the credit box will gradually expand. increased level of servicing transparency to investors, they have no assurance that servicers are performing their best and that all applicable guidelines and requirements are being followed. Credit risk management, or surveillance, could be that mechanism to provide servicing transparency and risk mitigation. It was used on a significant number of subprime deals prior to the mortgage meltdown, and it proved its worth to those investors. What kinds of data could be captured and communicated? Today, Clayton's surveillance group receives more than 400 data fields from more than 35 servicers. It is important that clients turn to companies that can provide the following services: pertinent information about the property and the borrower including original value, loan amount, and lien position; loan performance characteristics including current balance, current payment, last payment date, updated valuation information, delinquency status, and corporate and investor advances; and insight into every loss mitigation event, whether it's a modification, short sale, bankruptcy, or foreclosure. Are You Buying MSRs or Headaches? M SRs are one of today's hottest trades. As new capital requirements prompt money center banks to rethink their appetite for MSRs and servicing, billions of dollars worth of bulk sales are coming to market. New, non-bank purchasers are certainly realizing and capitalizing on the opportunity. But are they adequately evaluating the