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RATINGS AGENCIES SEE WEAKNESS IN NEWER RMBS As Moody's Investors Service rates residential mortgage-backed securities (RMBS) in postcrisis years, the firm continues to harbor some concerns about the strength of some loan pools. Likewise, Fitch Ratings says although most representation and warranty guidelines for recent RMBS transactions have been "substantially stronger than observed in pre-crisis transactions," it has encountered some proposals that fall short of today's stronger standards. "The decline of the U.S. housing market that led to investor losses exposed limitations and flaws in many aspects of the RMBS framework," Moody's VPs Kathy Kelbaugh and Yehudah Forster stated in a recent report. These flaws included misalignment of investor and issuer interests, insufficient or unreliable loan data, and instances in which the risk of fraudulent or defective loans falls to investors, Kelbaugh and Forster explained. However, Moody's maintains some of these flaws continue to exist in today's market. In its report, Moody's pointed out several risky representation and warranty features the firm still sees among new RMBS deals. The expiration, or sunset, of representations and warranties is one weakness Moody's highlights. Recently adopted by the GSEs, sunset clauses "are problematic because they expose investors to defects that appear later in the life of the loan," according to Moody's. "These sunsets are particularly questionable when they apply to loans that have shown signs of troubled performance prior to the sunset," Moody's added. Another concern is "expanded materiality factors," which "allow loans that are clearly riskier than originally disclosed to remain in the pool because they still fall within the originator's underwriting or program guidelines," Moody's stated. Some RMBS representations and warranties make concessions for borrower life events—such as death or divorce—letting the originator off the hook when a loan defaults due to these circumstances. Moody's contends borrower life events are often associated with default, and these defaults, nonetheless, could reveal risky lending. Representation and warranty clauses that limit breach reviews can also cause investors to suffer undue losses, according to Moody's. Similarly, the use of clauses that hold originators responsible for only some loan data while ignoring other data sets "reduces the originator's incentive to provide accurate, reliable data," Moody's said. 14 Moody's also objects to procedures that direct a loan reviewer to "presume that no breach has occurred, in all but the clearest cases." Third-party diligence reviews are an important part of any RMBS transaction, and Moody's contends these reviews must be comprehensive. Fitch Ratings is a strong proponent of the American Securitization Forum's Project Restart, which created a rep and warranty framework following the housing crisis. According to Fitch, the framework offers "a high standard that provides the most assurances about loan origination and underwriting quality." Some of the most recent RMBS transactions Fitch reviewed stray from these guidelines and are "weak," as described by the agency. "Fitch views these proposals as less robust and believes that risks need to be accounted for in order to limit investors' exposure to defective mortgages," the agency said in a recently published report on the changing rep and warranty landscape. In September, the Federal Housing Finance Agency released a new representation and warranty framework for the GSEs. Notably, if a borrower remains current on his or her loan for 36 consecutive payments, the GSEs will not require a repurchase for certain breaches in underwriting. While Fitch "believes the GSE framework is a reasonable template" for private-label RMBS, the agency said some of the guidelines are being "diluted" in the private market. For example, Fitch has observed some non-GSE RMBS transactions that allow lenders to escape certain repurchase demands after current payments for less than 36 months. Additionally, some RMBS contain "subjective" language regarding whether a default occurred due to a "life event" instead of a breach, according to Fitch. "While Fitch acknowledges the importance of greater certainty around put-backs for lenders, the agency believes some proposals have the potential to significantly weaken a transaction," Fitch stated. Fitch suggests a few criteria to decrease risk for investors, including "100 percent third-party due diligence" loan file reviews and full documentation of borrower income and assets to demonstrate credit quality. The agency also stresses that originators be "investment-grade" with longstanding track records. As the market adjusts to new frameworks, Fitch advises new standards "should be accompanied by greater transparency and disclosure." SURVEY: 80% OF STRATEGIC DEFAULTERS WANT TO RETURN TO HOMEOWNERSHIP The American Dream of homeownership has been resurrected among strategic defaulters, a foreclosure agency stated in a recent report. After surveying previous clients, YouWalkAway.com found nearly 80 percent expressed a desire to purchase a new home again within the next 12 months. YouWalkAway.com says it's common for previous customers to desire homeownership since interest rates are low and homebuying lessons have been learned. Citing data from Moody's Analytics, the foreclosure agency also revealed the number of eligible homebuyers who experienced a foreclosure will be 1.5 million by the first quarter of 2014. "Millions have experienced the unfortunate event of foreclosure, but that does not mean that they should be discouraged from becoming homeowners again in a more stable environment or that they should be disqualified from doing so," said Jon Maddux, former CEO and co-founder of YouWalkAway.com. According to Federal Housing Administration (FHA) guidelines, borrowers who experienced a foreclosure are generally not eligible for an FHA-insured loan until three years after the foreclosure and only if they have re-established good credit and meet FHA's fully documented underwriting requirements. Shari Olefson, attorney and author of "Financial Fresh Start: Your Five Step Plan for Adapting and Prospering in the New Economy," says a person's credit score would need to be at least 580 to 620 to qualify for a mortgage post-foreclosure, and she notes that eligibility is also dependent on other pieces of the credit picture. To assist prospective homebuyers who've undergone foreclosure, YouWalkAway. com announced the introduction of AfterForeclosure.com, an online tool designed to help former homeowners gauge where they are in terms of becoming eligible for homeownership again. "With historically low interest rates, mortgage payments often rival rental rates," Maddux said. "The ability to lock in these reduced rates puts more money in consumer pockets and, ultimately, lends to overall recovery. It's a win-win and its accessibility needs to be made clear."

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