This week at the Mortgage Bankers Association National Secondary conference there was a panel entitled "The Role of Rating Agencies and the Re-emergence of the Private Label RMBS Market".
As I sat down to listen to the discussion I was reminded of what Albert Einstein has said "insanity: doing the same thing over and over and expecting different results".
Will the RMBS investment community do the same thing again and rely on ratings to determine risk? Will the rating agencies do the same thing again and rate securities in the same ways as before? Do we expect a different result?
The good news is that the answer is No, No, and Yes.
No the investors will not rely solely on ratings. In fact, many investors do their own due diligence reviews and given the availability of the loan level data also do their own risk analysis. For some there isn’t even a requirement to have a rating. According to the panelists RMBS investors still don’t trust rating agencies and this is why they often do all of their own reviews and credit analysis.
In my mind the reliance on another party for something as important as the risk analysis has always been odd so I think it is good that those whose money is on the line are taking a detailed and keen interest in understanding the risk. So the investors are not doing the same thing and they are expecting a different result.
No the rating agencies are not doing the same thing. In fact they have changed a lot. The basic premise of the past that the data going into the rating model is correct has been replaced with a healthy dose of skepticism.
Originators have to be assessed, third-party due diligence reviews of all the loans and the key data elements are done (usually on 100 percent of the loans), and credit worthiness in the event of a rep and warranty issue has to be determined.
The goal of course is to insure that the rating agencies understand the data being delivered, have some assurance that it is valid, and that in the event of a repurchase event down the road the counterparty has the financial ability to ability to repurchase the loan. This is all good news and should certainly improve the accuracy of credit enhancement levels and the value of a rating. So the rating agencies are not doing the same thing and expecting a different result.
Yes, we do expect a different result. We expect to be able to safely and effectively produce private-label RMBS and provide private liquidity to the mortgage finance market.
It may take still more time but we have already issued in 2013 as much as was issued in all of 2012 and the market will continue to grow and expand.
Thankfully, by Albert Einstein’s definition we are indeed not insane.