InvestmentsMortgage

Clayton Holdings becomes first Morningstar-rated ‘deal agent’ for mortgage bonds

Increased oversight of private-label deals could spur market

Earlier this year, several of the “biggest bond funds on Wall Street” released a proposal to include an additional layer of oversight and protection on private-label mortgage bonds as part of an effort to jumpstart the languishing private mortgage market.

The additional oversight would come in the form of a “deal agent,” which is an independent party that would monitor the framework and performance of private-label securities to provide investors with more confidence about private-label deals.

Now, Morningstar Credit Ratings is helping to move the concept forward by issuing it first “deal agent” ranking.

According to Morningstar, the ratings agency assigned two new vendor rankings for the recently created roles of deal agent and representation and warranty reviewer in the residential mortgage-backed securities market to Clayton Holdings.

Morningstar said that Clayton, a wholly owned subsidiary of Radian Group, is the first vendor to receive a ranking as a deal agent and representation and warranty reviewer.

According to Morningstar, the company is the only ratings agency offering vendor rankings for these types of firms that provide governance and oversight for RMBS because it believes in the importance of the deal agent concept.

“We believe these new vendor ranking functions are significant to the financial services industry and will play an important role in the revitalization of the private-label RMBS market, which has slowed since the financial crisis of 2008,” Michael Gutierrez, managing director, operational risk assessments for Morningstar Credit Ratings, said. “Having an independent assessment of a company’s capability to perform these functions can serve to reassure investors who are reluctant to reenter the marketplace.”

And according to Morningstar, Clayton fits the bill for a deal agent, and the agency assigned “MOR RV2” residential vendor ranking as a RMBS deal agent and “MOR RV2” residential vendor ranking as a residential representation and warranty reviewer to Clayton.

Morningstar said that the forecast for both rankings is “stable” due to Clayton’s “solid vendor performance derived from a tenured management team, highly flexible technology environment, pervasive enterprise-wide risk-management infrastructure, and focus on client-driven performance results.”

Morningstar said that the assigned rankings are due to Clayton’s “operational infrastructure and client-driven performance results in its respective lines of business.”

Morningstar notes that the deal agent concept is not a new one, but it regards it as “vital” to the revival of the private-label market, and feels that Clayton can fill that role.

“The specifics of the deal-agent role and its accompanying responsibilities continue to be discussed by industry stakeholders and may require a variety of different services based on investor preference and transaction type,” Morningstar wrote in its report. “The full suite of mortgage industry services offered by Clayton and its subsidiaries positions the company well to fulfill the anticipated role of the deal agent and representation and warranty reviewer as well as any customized requirements that may be mandated by industry stakeholders.”

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