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Investors uncertain about due diligence loan disclosures

About 50% of U.S. investors in the securitization market are unsure as to whether they have sufficient disclosures to perform due diligence, even with a more mature infrastructure and streams of quality data when compared to other global markets such as the European Union, according to Principia

While investors demonstrated more confidence in the securitization framework in the U.S., many are experiencing greater uncertainty as a result of a continued lack of clarity regarding impending regulations such as Basel III, issuer due diligence requirements and specific pieces of the U.S. Securities and Exchange Commission’s Regulation AB II, Principia said in its structured finance perspectives report.

Thus, U.S. investors remain unsure as to whether the information that is currently disclosed by issuers will be enough to meet final due diligence demands and capital requirements, the company noted. 

About 51% of structured finance investors believe that their operational systems are less than effective at consistently managing the growing volume of loan level data and collateral performance across asset-backed securities, mortgage-backed securities and collateralized debt obligation investments, the report asserted. 

“Investors are prioritizing due diligence,” said Douglas Long, executive vice president of business strategy at Principia. 

He added, “We anticipate further data standardization that is geared towards meeting investor due diligence requirements, as well as an increased demand for operational solutions dedicated to structured finance that can bring data and analytics together in a meaningful way to drive effective and controlled investment decisions, risk surveillance and accounting.”

More than 100 securitization investors from 63 organizations took part in the study, with 60% stating that they use four or more different data sources for collateral performance alone. Also, more than 80% of investors confirmed that it was a challenge to normalize performance data across multiple data sources. 

“Global capital requirements and due diligence mandates now demand that investors are able to demonstrate adequate independent credit analysis, risk management and timely reporting when investing in structured finance assets. Key to this is access to, and effective management of, initial and on-going performance data on the underlying pools and collateral backing securitized assets,” analysts at Principia said. 

Earlier this month, the software provider for management, risk oversight and operational control of structured finance investments announced its latest development of system enhancements aimed at addressing the Market Risk Final Rule for securitization investment guidelines

Principia’s survey results are consistent with the view that drilling down to analyze loan by loan information is not necessary on a regular basis for assets backed by large homogenous asset pools within ABS or securities with government guarantees such as agency RMBS.

Click on the graph to view depth of analysis investors go to for each asset class. 


For instance, about 13% of U.S. investors do not use pools statistics in their analysis of RMBS, compared with 2% of nonagency RMBS investors, according to Principia data.

Also, compared with private-label deals, 70% of investors stated they use loan level data in the analysis of RMBS, compared with 93% of investors in nonagency RMBS.

“Increased loan level disclosure following initiatives from Fannie Mae and Freddie Mac may see this figure increase as they provide loan level data for new securities that they issue,” the report stated.

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