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» VISIT US ONLINE @ DSNEWS.COM FIVE MINUTES WITH GET TO KNOW INDUSTRY EXECUTIVES BEYOND THE BOARDROOM Bruce Legan PRESIDENT OF CLAYTON CONSULTING SERVICES Bruce Legan joined Clayton Holdings, LLC, in August 2006 as senior managing director and became president of the consulting division in 2007, responsible for helping clients prepare for the evolving nature of risk in the mortgage marketplace. Previously, he directed Ernst & Young's structured finance advisory mortgage business, was a managing director with MBIA Insurance Corporation, and a VP at GMAC RFC. How has Clayton remained at the forefront of such an unpredictable industry for nearly a quarter-century? The key to Clayton Holdings'—and, more specifically, our group, Clayton Consulting Services'—staying power is that we've been able to adapt our core competencies, skills, and experiences to address changing market needs. We're applying years of experience in reviewing residential mortgage servicing operations to today's regulatory-driven environment. On the origination side, we are now being hired by REITs, private equity firms, and large banks to perform operational due diligence for mortgage servicing rights, M&A, and warehouse lending transactions. How do today's mortgages compare to home loans from seven to 10 years ago? The loans originated in recent years are some of the most pristine loans made in decades. Today's vintages have tighter underwriting standards, higher credit scores, lower loan-to-value ratios, and more accurate appraisals. Originators have strengthened operational processes, procedures, and controls, contributing to low default levels. Additionally, quality control reviews are conducted earlier in the process, which pushes lenders to make the right decisions with fewer exceptions. What's key to bringing private capital back to the secondary mortgage market? While there's no easy answer, there are some shortand long-term decisions that would create more "room" for private capital. GSE guarantee fees could increase to make the execution of private-label residential mortgage-backed securities (RMBS) and GSE securitizations more comparable. Lowering conforming loan limits would also increase the need for private-label RMBS, making more product available to securitize. Longer-term, questions remain surrounding the future of the GSEs and the role of the Federal Housing Administration (FHA). Are Fannie and Freddie going away? Morphing into something else? What borrowers should FHA serve? Private capital will remain on the sidelines until greater regulatory clarity emerges. Updated securitization rules and standards would give private-label investors more certainty in pricing credit risk, standardized data definitions, accurate loan-level disclosure, enforceable representations and warranties, and access to loan-level details. What's the biggest challenge servicers face from new regulations? The cost, effort, and time required for correct implementation. Think about it: servicers have to understand a myriad of regulations, perform gap assessments to identify operational changes needed, incorporate those changes, identify affected upstream and/or downstream processes, document the appropriate procedures, and test the output accordingly. What do the new servicing standards mean for investors? The short answer is higher servicing costs, but on a positive note, new regulations and oversight will also mean greater transparency. Increased regulations, higher costs, and reputational risk will potentially reduce the number of servicers in the marketplace. Consolidation means there will be more consistency and a greater comfort level in compliance standards, but investors will have to choose from a smaller pool of servicers and subservicers. 29

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