One of the enduring legacies of the mortgage crisis is the lack of standardization in the residential mortgage-backed securities (RMBS) market, particularly as they relate to warranties and repurchase enforcement mechanisms.
This, at least, is the position of the Structured Finance Industry Group, which recently released its “RMBS 3.0” plan to develop standards and reduce substantive differences within current market practices, and establish generally accepted best practices as an improvement over what the group considers a slapdash set of approaches to RMBS lending in the post-crisis market.
These “green papers,” as the SFIG calls them, are the opening salvo to what the group hopes will lead to a final set of white papers that set industry-accepted practices without the government stepping in, according to Richard Johns, SFIG's executive director. "This project is about an industry recognizing its challenges and working collectively to solve those issues in a way that does not require regulatory mandate,” Johns said. Still, he added, the 3.0 plan is meant to complement the U.S. Treasury's efforts to bring private capital back to the market.
Overall, the RMBS 3.0 effort also looks to clarify differences in alternative standards in order to improve transparency across RMBS deals, develop new solutions for a sustainable, scalable, and fluid post-crisis RMBS market, and draft alternative benchmark structural approaches to the process of RMBS lending.
There would, according to the green papers, be a variety of basic models for RMBS issuance involving various types of sponsors. These sponsors ‒‒ regulated financial institutions, mortgage companies, investment entities set up by banks, and mortgage REITs ‒‒ would include originators of mortgage loans seeking to sponsor their own securitizations, as well as those that acquire and aggregate mortgage loans from third-party originators according to their own set of acquisition guidelines.
Issuers would have different levels of risk tolerance and varying internal policies, but a given framework would need to accommodate operational differences between originators and aggregators that act in the role of securitization sponsor.
"A strong, effective housing finance market requires a number of well-functioning, deep sources of liquidity,” said Eric Kaplan, chair of the RMBS 3.0 Task Force. “As an industry we recognize that the current RMBS market — a critical source of financing for the overall industry — needs continued development of best practices in order to grow and fulfill its full potential in supporting the U.S. housing market."
The release of SFIG's second edition green papers is expected in early November.