Residential mortgage backed securities - a fresh start
In the summer of 2008, the American Securitization Forum (ASF) announced the launch of Project RESTART. Project restart is an industry developed initiative to rebuild investor confidence in mortgage and asset backed securities. This is necessary to restore the flow of capital in the secondary market. A healthy secondary market is necessary to the availability of affordable credit for the housing industry.
Senior industry policy makers and ASF professional staff are developing transparency, disclosure, and due diligence standards for new Residential Mortgage Backed Securities (RMBS). On July 15, 2009 the ASF issued the Final Release of the ASF RMBS Disclosure and Reporting Packages. If you look at the loan level data fields that begin on page 37 of this document you will have a better appreciation for how the industry is holding industry participants accountable for the accuracy and integrity of the mortgages that make up a pool of loans. There is no room for error. Those looking for a loophole to profit financially at the expense of others will not be able to do so.
The loan level data requirements required by the proposed security instruments will affect every homebuyer and homeowner on new purchase and refinance transactions. Lenders are already tightening standards in response to the requests by FreddieMac, FannieMae, and the FHA to reduce fraud and improve loan quality. The ASF will continue to improve origination standards to create better RMBS. These are fields that will be included in future RMBS and one of the reasons why mortgages are taking longer to process and close:
IRS 4506-T indicator – allows the lender to request the borrower’s federal tax returns directly from the IRS. Almost all lenders are already doing this on self employed borrowers and some are doing this on wage earners.
covered High Cost loan indicator - identifies loans that were closed at “high cost” levels based on state or federal regulatory standards for closing costs and fees.
broker indicator – indicates when a mortgage broker took the loan application. There is also a field for origination channel. Third party originated loans have shown a higher rate of default due to compromised integrity.
number of mortgage properties a borrower owns – the number of properties owned and leveraged by mortgage debt can increase the risk of default.
AVM Model name and confidence score – Automated valuation models (AVM) are being used by lenders to support the credibility of the market value given on a full appraisal report. An AVM is a computer generated value based on recent sales on the subject property’s market neighborhood. AVMs also give a confidence score which states the “confidence” of the AVM value based on the availability of recent data. AVMs are used primarily in master planned communities where comparable sales are available (of homes that are very similar to the property being appraised). AVMs are not used on custom homes, rural properties, or unique properties. The days of only one appraisal report per loan are gone. In most cases, there are now two appraisals (full report plus AVM).
I am going to stop with these five fields, as inconsistencies with any one of them has the ability to raise red flags with a lender, slow processing, add underwriting conditions, or halt a closing. They are all measurements of risk.
I have a high degree of confidence in the success of Project Restart. All industry participants are represented in formulating a better RMBS. Involved in the project are originators, institutional investors, security issuers, loan servicers, rating agencies, trustees, attorneys, vendors, and due diligence companies. Since defects in the origination process of a mortgage affect the performance of RMBS, loans that are originated with misrepresented credit quality should be removed (or replaced) from a RMBS. These documents are an inside look at the assumptions made by issuers and investors about the underlying collateral in RMBS, and a formula for our future.
Related article: Mortgage 101 - what is the secondary market?
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