Disclosure Requirements Foil MBS Plans
It's proving more difficult than anticipated for banks to issue bonds backed by seasoned home loans.
Bank of America officials have told industry players in recent weeks that they are turning pessimistic about their ability to securitize pools of older mortgages gathered from other originators - including credits inherited with the bank's 2008 purchase of Countrywide. Sources also suggest that J.P. Morgan could be in a similar position with accounts from Washington Mutual. Some smaller issuers are expressing doubts as well.
Oddly, the culprit is a set of collateral-disclosure requirements set forth Dec. 15 as part of the American Securitization Forum's Project Restart - a program that seeks to improve conditions in the beaten-up market for non-agency mortgage bonds through improved reporting standards.
In the following months, a consensus emerged that the sector's first steady supply in years would come from a growing pipeline of deals backed by older credits. The belief was that it would be fairly simple to bundle those so-called legacy credits into securitization pools, as long as buyers were willing to venture back into the market.
But as banks and other lenders sift through their existing mortgage portfolios, they're realizing that it will be impossible in some cases to meet the ASF standards. The upshot is that seasoned-loan deals will likely amount to a mere trickle that will take longer to develop than initially thought.
The difficulties stem from loan-specific "representations and warranties" that the ASF deemed necessary, especially in cases where the issuer didn't originate the credits or when servicing was initially handled by another company. An executive at one small originator that farms out servicing to other companies said he can't meet even half of the trade group's guidelines.
For instance, Project Restart requires originators to confirm a borrower's occupancy status by considering how far from the property he or she works and whether the individual owns any other real estate, and by comparing mailing and home addresses. Lenders often must verify that credit scores are no more than four months old as well, and that the latest appraisals are no more than six months old. On top of that, they have to ascertain that appraisers are qualified and have no interest in the property or loan.
While not enforceable, the ASF disclosures are essentially required by investors. That is, if an issuer doesn't provide them, "you don't get a deal done," one lender said. The SEC and other federal entities have been considering similar measures.
That may in part explain why BofA hasn't yet acted on a March 5 SEC filing that suggested the bank was preparing a mortgage securitization through a longstanding shelf entity called Merrill Lynch Mortgage Investors.
As the primary advocacy group for the securitization industry, the ASF probably wasn't trying to interfere with banks' issuance plans. Indeed, the guidelines were drafted by a cross-section of ASF members that included lenders - and didn't appear to draw any opposition when implemented.
Apparently, it wasn't until issuers began trying to assemble securitization pools from their seasoned-loan books that they began to grasp the impact of the measure.
The ASF guidelines are less of an impediment for securitizations of new mortgages, as the loans are now being written to comply with the requirements. While the rules certainly add to the cost and complexity of issuance in those cases, American General and Redwood Trust have been able to complete deals this year. But with investor demand still shaky and origination volume lagging, there's unlikely to be a wave of follow-up offerings.