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Fitch Finds Weaknesses in Recent RMBS Transactions

While most representation and warranty guidelines for recent residential mortgage-backed securities (RMBS) have been ""substantially stronger than observed in pre-crisis transactions,"" according to ""Fitch,"":http://www.fitchratings.com/web/en/dynamic/fitch-home.jsp the ratings agency has begun to encounter some proposals that fall short of the industry's recently-enhanced standards.


Fitch is a strong proponent of the ""American Securitization Forum's"":http://www.americansecuritization.com/ 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 the agency reviewed stray from these guidelines and are ""weak,"" according to Fitch.

""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,"" according to a recent report


the agency published, titled _U.S. RMBS 2.0: Reps and Warranties Changing Landscape._

In September, the ""Federal Housing Finance Agency (FHFA)"":http://www.fhfa.gov/ released 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 for lenders to escape certain repurchase demands after far fewer 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,"" the agency stated.

Fitch suggests a few criteria to decrease risk for investors, including ""100 percent third-party due diligence loan file review,"" ""high credit quality pool with full documentation of borrower income and assets,"" ""investment-grade originator with longstanding track record,"" and ""very low repurchase demand activity for post-crisis originations.""

As the market adjusts to new frameworks, Fitch advises new standards ""should be accompanied by greater transparency and disclosure.""


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