SitusAMC subsidiary Securent is expanding its reach into the private-label market with plans to soon introduce a loan-defect insurance product for residential mortgage-backed securities (RMBS) transactions, according to executives from both companies.
The initial focus of Securent, which was launched late last year, has been to provide loan-level loan-defect insurance for third-party mortgage originators working in the agency space, the executives said. The company is now preparing to unveil similar coverage for the secondary market with the goal of introducing a private-label insurance product in 2022.
Securent’s parent company is well-positioned to help it make a successful foray into that largely uncharted insurance market, which is regulated at the state level. SitusAMC, a leading provider of services and technology to the real estate industry, controls some 60% to 70% of the due-diligence loan-review market, according to its CEO, Michael Franco. In terms of competition, Franco added that the private-label market is now largely uncharted territory with respect to loan-defect insurance.
“Securent is a live insurance concept that has started working with the agency end of the market but is looking to expand into nonagency side to support both whole-loan trading and [private-label] securitization transactions in 2022,” Franco said. “Nobody else has done loan-defect insurance for securitizations yet.”
Justin Vedder, president of Securent, explained that loan-defect insurance covers most loan-origination errors and omissions. He said that might include cases where income requirements or some other underwriting guideline is miscalculated during the origination process, adding that the insurance would kick in if those defects prompt either a loan default or the inability to sell the loan.
Franco added that to get that insurance benefit, loans would require a third-party review.
“We are getting licensed in every state,” Vedder said, adding that includes meeting the capitalization requirements for operating in each state. “So, it’s not cheap to get into the business.
“… We have internal resources that have helped us develop a pricing model [for the insurance] that takes into account losses given defaults and economic issues like COVID-19, and we use Moody’s models along with a couple other models — plus some historical purchase data from Fannie Mae and Freddie Mac,” Vedder explained. “We combine that all together into a special sauce and that creates a price on a loan-by-loan basis and a pool-by-pool basis.”
As part of a private-label securitization transaction, hundreds or even thousands of mortgages are pooled, vetted and placed in a trust. Securities backed by the loans are then issued and sold to investors.
Vedder, who has two decades of experience in the mortgage-banking and insurance markets, says Securent also is currently in discussions with ratings agencies and RMBS issuers about how the company’s loan-defect insurance products can best serve the private-label securitization market. He stressed that SitusAMC and its resources also will be leveraged by Securent because of “all the technology and all the capability and all the expertise they have around the secondary market.”
Franco declined to comment on the potential premium income that might be generated by Securent in providing loan-defect insurance for the secondary market, though he did say “if premium dollars weren’t in the millions, then why do it?” He added that RMBS issuers would purchase the loan-defect insurance coverage for mortgages backing private-label issuances, and the premiums would be funded by proceeds from the securitization deal, “just as attorneys and deal structurers get paid.”
“The insurance premium would be something that the [mortgage securitization] trust would pay, and that way the insurance would be for the trust’s benefit,” he added.
Securent’s efforts to introduce loan-defect insurance in the private-label market also benefits from good timing. The huge boom in single-family mortgage originations in recent years — some $8 trillion worth over the past two years, according to the Mortgage Bankers Association — has fueled double-digit growth of the private-label market based on securitized loan volume.
On the other hand, that growth also has created a ripe environment for loan-origination defects. A December report by ACES Quality Management, a technology provider to the financial-services industry, shows the overall “critical defect” rate for mortgage originations in the second quarter of 2021 was 2.27%, up from 2.01% in the prior quarter.
The single largest error rate by far, according to the ACES report, was in the category of “income/employment,” which accounted for more than 32% of all critical loan defects in the second quarter of last year. The report is based on an examination of post-closing mortgage data from 100,000 unique mortgage-origination records, with defects categorized using Fannie Mae’s classification system — or taxonomy.
“It has been a hot market,” Vedder said. “I’m not blaming anyone, but they [lenders] couldn’t hire fast enough, vendors couldn’t hire fast enough. It was just a complete explosion.
“So, you had processors probably doing some underwriting, and people stressed from working so many hours. … So, that’s why you have had so many manufacturing [loan-origination] defects in my opinion.”
Franco added a hypothetical event to the mix to explain the safety-net benefit of insuring loan pools against critical loan-defect risks. He said that if some lender and RMBS issuer “went sideways,” causing the business to fail after the lender had originated a lot of loans with critical defects that are now part of a securitized loan pool, “then the trust [overseeing the loans] has no recourse” for recouping the losses.
“But if you have insurance … standing behind the transaction, then you are covered for any manufacturing defects that occurred. … We’re trying to bring a higher level of liquidity and visibility into markets [and] that is healthy overall for more securitization volume on the nonagency side.”
Adds Vedder: “We’re actively discussing securitizations with Issuers now to decide how to best structure a policy that works to make the most efficient securitization and claims process we can possibly make. We want to make sure all parties win …. and luckily we have great clients that want to work with us to kind of explore and develop this product with us.”