The U.S. Securities and Exchange Commission’s Rule 15Ga-2 takes effect on June 15, for new residential mortgage-backed securities, and it should provide transparency into the credit quality of mortgage loans underlying transactions, Moody’s Investors Service says in a client note.

The rule will require issuers or underwriters of asset-backed securities that nationally recognized statistical rating organization rate to publish the findings and conclusions of any third- party review firms’ due-diligence reports on loan quality.

“The SEC’s Rule 15Ga-2 will improve investors’ ability to assess the risk in the assets that back the transactions. Prior to the rule becoming effective, issuers and underwriters typically kept loan- level TPR findings private and made them available only to rating agencies while providing a summary of the findings to investors,” Moody’s says.

Once the rule becomes effective, in the likely case that the reports are consistent with what issuers previously provided to rating agencies, investors in prime jumbo RMBS will be able to view reports that include:

  • Credit reviews that assess the extent to which the loans in the transaction conform to the originator’s lending guidelines
  • Property valuation reviews that assess whether information in the loans’ files reasonably support the loans’ appraised values
  • Compliance reviews that assess whether the loans were originated in accordance with federal, state and local laws
  • Data integrity reviews that assess whether the data provided by the issuer is the same as the information in the loan files Transactions backed by other types of loans may also be accompanied by other types of reports. For example, TPR reviews for RMBS backed by re-performing loans have typically covered the quality of additional reporting fields, such as borrower pay histories.

“Issuers will develop their own formats for summary reports that satisfy Rule 15Ga-2, and the quality of the TPR information will vary across transactions. Over time, these variances should diminish as due diligence reports become more standardized as investors provide feedback to issuers,” Moody’s says. “Some issuers may remove detail from their reports now that they will be more broadly distributed, in an effort to reduce their potential legal liability.”

Any such deletions are likely to consist of redundant data or borrower personal information, so the reports should not exclude information that would have helped rating agencies form a credit opinion. Deleted redundant data might include data that are available from loan data tapes, TPR firms’ own internal flags or codes, and data that are available on other reports.

“If, however, an issuer makes more material omissions that make it more difficult to assess loan quality, the added uncertainty could mean that the transaction would need more credit enhancement to achieve particular ratings. We would likely decline to rate a transaction if, in an extreme case, we thought that the information an issuer provided was insufficient for us to analyze the loans’ risk,” Moody’s says.