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The representation and warrant proposals in new residential mortgage-backed securities deals could expose investors to added risk from weak underwriting and defective mortgage loans, according a report by Fitch Ratings.
In Fitch's view, the rep and warranty as well as enforcement mechanism framework established post-crisis reflects a high standard that provides a higher degree of assurance about loan origination and underwriting quality.
"These RW&Es contain few 'knowledge qualifiers,' and the repurchase obligations are for the life of the loan," the report noted. "The enforcement mechanisms are clearly defined, the duties and responsibilities of all parties are prescriptive, and there are few ambiguities."
The September announcement by the Federal Housing Finance Agency that it will limit repurchase dmeands for breaches of certain reps if a borrower makes consectively timely payments -- 36 to be exact -- has set the stage for the private label market, Fitch noted.
"Fitch understands the FHFA’s reasoning and believes the framework, together with an expanded focus on quality control, due diligence, and strong underwriting, helps balance lender and investor interests," the credit rating agency stated.
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