Securitization Group Wants Greater Risk Disclosure by Lenders

The American Securitization Forum (ASF), a group affiliated with the Securities Industry and Financial Markets Association (SIFMA), issued a request for comment on new policies it plans to put on the industry. The policies address risk mitigation and disclosure by mortgage originators. ASF released the final version of disclosure packages that issuers will provide prior to sale of private-label residential mortgage-backed securities (RMBS). The disclosure packages will be updated on a monthly basis by RMBS servicers to ensure up-to-date information on RMBS performance in concert with inherent risk. The industry has seen rising complaints that originators and lenders did not adequately manage risk in the loans they made that were later sold into residential mortgage-backed securities (RMBS) transaction, ASF notes. When the loans went south, so too did the transactions. But because the loans were securitized, the loss must be absorbed by investors, while the lenders initially responsible for the quality of the underlying collateral took no hit. The ASF said it receives complaints that the usual means of disclosing origination risks by the originator at the time of sale to the investor for securitization do not properly provide means for returning “defective” loans to the originator. The proposed guidelines may not solve the underlying issue, but they aim to make risk inherent in RMBs more apparent, imposing greater disclosure of risk in mortgages at the time of sale for securitization. “By increasing data and standardizing available information, institutional investors will be able to better distinguish pools of high quality loans from lesser quality pools,” ASF said in a statement on the proposed rules. “The resulting differentiation will produce greater market discipline, as market forces will serve to reward originators who deliver higher quality packages of mortgage and consumer loans, while penalizing those who do not.” ASF adds: “By giving owners of outstanding RMBS and potential purchasers of outstanding RMBS more expansive and robust information on the performance of the loans in existing pools, this new transparency should appreciably aid moving distressed assets from troubled institutions to purchasers better able to bear the credit risk of those assets.” Write to Diana Golobay.