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Private-label RMBS players support MERS and stronger guarantees

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Investor wariness over risks associated with loan pools in residential mortgage-backed securities is stalling a recovery in the private-label market, industry experts said Wednesday. However, a recovery in the market is possible, experts say, as long as a few incentives are implemented. During a House Financial Services subcommittee hearing on boosting investor demand in the mortgage market without a federal guarantee, Martin Hughes, president and CEO of Redwood Trust, said the government must focus on settling the concerns of RMBS investors to restore faith in the private-label market. "Investors want a fair return on their investment (and) to have information about what they are investing in through access to increased data on the underlying collateral and simpler securitization structures," Hughes said. He said RMBS investors need "to know if there are any potential conflicts of interest with and among the originator, servicer and sponsor; an alignment of interests with the sponsor; and confidence that their rights will be respected under contract law." In April 2010, Hughes' company became the first to launch a securitization of residential mortgage loans without government support. The company marketed the first RMBS transaction since the housing bust was worth $238 million and was followed by a second $295 million deal in March. Since RMBS deals come with a substantial amount of risk for investors, Hughes and Josh Rosner, managing director of Graham Fisher & Co., told the House panel success in the private market is contingent on investors trusting representations and warranties made on collateral sold to securitization trusts. "Investors must have confidence that they will be protected from losses on the underlying collateral through improved originator representations and warranties on the collateral sold to the securitization trust and that there is an effective enforcement mechanism such as the mandatory binding arbitration that we used in our last two securitizations," Hughes said.  "We propose the establishment of national uniform standards for servicers’ rules and responsibilities, along with benchmarks that allow for the removal of the servicer for poor performance." Rosner delved into the same issue, saying there's a lack of uniformity on contractual obligations tied to securitized mortgage pools. He said each RMBS issuer offers a different pooling and servicing agreement and representation and warranty agreement. "Panic set in and investors began to question the value of their securities," during the 2008 credit crunch, he said. The result, according to Rosner, was a run on the market pushing securities values into a downward spiral. Rosner advised lawmakers draft legislation that would create a single, standardized pooling and servicing agreement to protect the interests of RMBS investors. Ajay Rajadhyaksha, managing director of Barclays Capital, concurred saying to make private label RMBS issuance more attractive, there needs to be a "transparent and timely way to enforce representation and warranties" agreements. Furthermore, Rajadhyaksha believes legalizing the Mortgage Electronic Registration System will streamline the legal process to accurately transfer loans. "Make this process uniform across states," Rajadhyaksha wrote. "This will remove uncertainty around the documentation related to proper ownership of these loans." With investor confidence an utmost concern, Chris Katopis, executive director of the Association of Mortgage Investors, said servicer practices need to be addressed to build up investor confidence. "Many servicers are conflicted, and they may not be servicing mortgages properly," Katopis said. "Very often they are harming the interests’ of both investors and homeowners’ interests. This has a negative impact on private investor demand for mortgages and limits housing opportunities." He added, "originators and issuers may not be honoring their contractual representations about what they sold into securitization." Write to Kerri Panchuk.

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