New MISMO standards are critical to a growing PLS market

Prior to the Great Recession, private label securitizations (PLS) constituted a majority of all residential mortgage-backed securities (RMBS) issued.  In the intervening years, the makeup of the RMBS market has changed significantly and, today, Fannie Mae, Freddie Mac, and Ginnie Mae are responsible for approximately 99% of RMBS issuance. For a variety of reasons, including recent policy changes at Fannie Mae and Freddie Mac that cap second home and investor property loan volumes, and growth in jumbo loan volume driven by increasing home prices, there has been renewed interest in the PLS market and its future growth.

Fortunately, MISMO, the real estate finance industry’s standards organization, is here to help market participants navigate any uptick in PLS activity from a data perspective. Since 2018, MISMO has been developing a modern, standardized data set to facilitate the electronic exchange of information to the credit rating agencies that analyze risks in mortgage assets. I am pleased to announce that MISMO will soon make this new standard available for public comment.

Data comparison and evaluation are essential for credit rating agencies to analyze risks in mortgage assets. In fact, the secondary market for the securitization of mortgages requires data to be shared among parties in order to rate the underlying assets. Industry professionals rightly recognized that the lack of a standard had created a void in the secondary securitization market and turned to MISMO to develop a business solution.

MISMO’s Private Label RMBS Valuation workgroup is collaborating across the real estate finance industry — including originators, issuers, rating agencies, due diligence third party reviewers, and investors — to develop a data exchange standard that permits the electronic exchange of mortgage asset data to the rating agencies, and we are committed to working with important stakeholders such as the Structured Finance Association (SFA) to ensure that this standard meets the needs of the entire market. MISMO’s new standard will improve the quality and consistency of the data sent to the rating agencies, which will in turn lead to faster, more efficient, and more accurate due diligence for private label RMBS.

What makes MISMO’s PLS initiative unique is that it creates a comprehensive disclosure package to help eliminate any confusion and inconsistency due to data in the ratings applied to securitizations. MISMO sees this dataset as a combination of an updated version of the American Securitization Forum (ASF) dataset, which has not been updated in years, merged with the supplemental dataset required by rating agencies in various forms.

MISMO’s PLS initiative creates data specifications for the rating agencies’ RMBS reporting requirements and provides an iGuide (implementation guide) for rating agencies, third-party reviewers (TPR), lenders and vendors. The end-result is that the rating agencies and TPRs can better rely on the data they receive via MISMO’s standard and can more accurately rate mortgage assets.

A key benefit of having a defined MISMO extract from an originator’s loan origination system (LOS) to feed to the TPR is that it allows for consistent data ingestion for comparison and evaluation.

Industry professionals will soon be able to access and use the MISMO Rating Agency Reporting Standardization package. It includes: 

•          PL RMBS ASF Mapping Specification v1.0

•          MISMO PL Rating Agency Standards iGuide v1.0

So, why is this so important? Since the Great Recession, Fannie Mae, Freddie Mac and Ginnie Mae have all made significant strides towards greater standardization of the mortgage data they handle, including through the use of MISMO.  Among other benefits, this level of standardization promotes enhanced data quality and consistency, which allows for greater operational efficiency and transparency in the secondary market.

Similarly, if market participants are going to truly capitalize on the increased volume of loans for which PLS may be the best execution in the secondary market — the second home, investor property, and jumbo mortgages mentioned earlier — then it needs the increased capacity and efficiency that comes from data standardization.  Without such standards, there will be a substantial bottleneck as each transaction will require 100 percent due diligence and manual processes. 

Will MISMO’s Private Label RMBS standard fully revitalize the PLS market?  Not on its own, but it will  eliminate a key barrier to the development of a more robust PLS market and it is worth noting that in addition to MISMO’s work, the Mortgage Bankers Association and SFA have been working to address other issues necessary to revitalize the PLS market. We encourage all interested parties to visit and register your comments once the standard is released for public comment. As part of our collaborative model, we are committed to engaging with the entire industry to make sure this standard meets the needs of all market participants.

Seth Appleton is the president of MISMO.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author of this story:
Seth Appleton at [email protected]

To contact the editor responsible for this story:
Sarah Wheeler at [email protected]

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