July 2012

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FEATURE SECONDARY MARKET government-imposed regulations, citing the 1933 Securities Act as a law that changed the name of the game for mortgage risk due diligence. "In the old days, you could hire your neighbor to do due diligence on these loans," he says. "And your neighbors might not know anything about mort- gages, except that they have one. Congress' solution was to force the diligence companies to be named as experts in the pro- spectus." He says that set up ac- counting firms and other market players for enormous liability in instances of "material misstate- ments or lies." Fraud certainly remains a staple of the government's efforts to clean up the mortgage indus- try. According to recent state- ments, the Residential Mortgage- Backed Securities Working Group continues to bulk up on personnel and funds to collar al- leged crooks from the crisis—not excluding mortgage lenders and accounting firms that bore the blame for faulty numbers. Santos likens his hopes for the task force to the facilitation of an independent private-sector organization like the Financial Accounting Standards Board, which has the go-ahead from Uncle Sam to name the rules of the game without necessar- ily functioning like a federal rulemaking agency. No single such body currently exists for mortgage risk due diligence. Just how will the task force work, once it assembles? Santos says that the committee will build an initial agenda that sets out how members will vote on due diligence standards and when committee members exit. Digital Risk plans to unveil results at the MBA conference next year. Although he demurs from naming names when it comes to companies and entities that accepted invitations, the chief executive admits that Digital "In the old days, you could hire your neighbor to do due diligence on these loans. And your neighbors might not know anything about mortgages, except that they have one." — Alex Santos, President, Digital Risk Smith Jr., the court-approved monitor of the landmark $25 billion servicer settlement, told us in a recent interview that the industry should subscribe to a national game plan. (See our exclusive interview with Smith in "Take 5" this issue.) That alternative may be more palpable if the task force fails to gain traction with consensus, Sharga says. "If you asked 30 CEOs to define what that meant, you'd get 30 different answers," he tells us. "If you go all the way up the ladder—from appraisers to underwriters to originators to the people who write securi- ties and run retirement trusts to invest in the securities—there is absolutely a lack of transparency. . . . People aren't sure what they can believe." He goes back to a lack of faith in everyone, maybe especially the investor. "Every investment portfolio is different, and not everyone has faith that what is being presented is accurate," he says. Asked how Digital Risk plans son yet and it's hard to navigate those organizations," he adds. Forced Tasks? A dards on paper? Whither the future of mortgage risk due dili- gence if the marketplace doesn't self-regulate? The alternative nd if the industry agrees to new due diligence stan- Risk recently called on represen- tatives from the SEC and CFPB to participate on the panel. "We haven't had the right per- may well lay with the leviathan so many lobbyists, trade groups, and political committees fear: the federal government. Market players don't need to wait for the Fed to wrap up RESPA reform; other govern- ment agencies already appear to be on the move in other areas of the industry. Experts say the CFPB is poised to deliver the first draft of what may look like national servicing standards this summer, with goals to make rules of the draft standards by January next year. Joseph A. cies some leeway. "Let's assume that ratings agencies models are correct," he tells us. Solid results from the task force "would help their models and help the agen- cies because, assuming [it] comes to the conclusion that diligence needs to be robust, then the ratings agencies' positions be- come stronger since their rating information is more accurate and reliable." Uncle Sam may rate the task to benchmark for results, Santos says that the goal is to create "a set of standards that are concep- tual so they can be flexible and applied [to] . . . shrink diligence times . . . so this obstacle hold- ing back the market can be removed." He gives the ratings agen- force differently—and force tasks onto the industry if the absence of change hints at a repeat of sins from the crisis. THE M REPORT | 77 ORIGINATION SERVICING ANALYTICS SECONDARY MARKET

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