Mortgage Investors Outline Steps to Restore Securitization Market

The Association of Mortgage Investors recently released a ""detailed set of guiding principles to Congress and regulators"":http://origin-qps.onstreammedia.com/origin/multivu_archive/ENR/FX-MM78857-20100330-1.pdf for how to overhaul the beleaguered securitization market in a manner that will ensure private sector demand for mortgages in the future, which the association says is crucial to the recovery of the global economy.

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In total, 10 different recommendations were made:

* Provide loan-level information that investors, ratings agencies, and regulators can use to evaluate collateral and its expected economic performance, both at pool underwriting and continuously over the life of a securitization.
* Require a ""cooling off"" period when asset-backed securities (ABS) are offered so that investors have sufficient time to review and analyze loan-level information before making investment decisions.
* Make deal documents for all ABS and structured finance securities publicly available to market participants and regulators.
* Develop, for each asset class, standard pooling and servicing agreements with model representations and warranties as a non-waivable, industry-minimum legal standard.
* Develop clear standard definitions for securitization markets.
* Directly address conflicts of interest of servicers that have economic interests adverse to those of investors by imposing direct fiduciary duties to investors and/or mandatory separation of those economic interests, and standardize servicer accounting and reporting for restructuring, modification, or work-out of collateral assets.
* Just as the Trust Indenture Act of 1939 requires the appointment of a suitably independent and qualified trustee to act for the benefit of holders of corporate debt securities, model securitization agreements must contain substantive provisions to protect ABS holders.

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* ABS should be explicitly made subject to private right of action provisions of anti-fraud statutes in securities law and to appropriate Sarbanes-Oxley disclosures and controls.
* Certain ABS could be simplified and standardized so as to encourage increased trading in the secondary market on venues, such as exchanges, where trading prices are more visible to investors and regulators.
* Ratings agencies need to use loan-level data in their initial ratings and to update their assumptions and ratings as market conditions evolve and collateral performance is reported.

The association said if these fundamental market restructuring steps are not taken, then it will be difficult, if not impossible, for capital market investors to return to funding economic activity to the degree they previously did.

""The time for action is now,"" said Micah Green, who represents the association and is a partner at ""Patton Boggs, LLP."":http://www.pattonboggs.com/ ""Investors provide the capital that make securitization markets work yet the lessons learned over the last three years demand greater transparency and empowerment of investors for them to be comfortable buying mortgage products in the future.""

Green said during the current crisis, investors have learned that they have little access to critical information about their mortgage securities investments and have even less influence over the management of those investments, which is clearly not appropriate given their fiduciary responsibilities of managing the investments of pension funds, insurance companies, and others.

""It is important for the government to consider the policy recommendations of investors, whose participation and capital are needed for there to be a viable mortgage-backed securities market, particularly if the role of Government in the mortgage market could change in the future,"" Green added.

The association, which represents a wide array of institutional investors and asset managers, said its recommendations are entirely consistent with the government's traditional roles of standard-setting in emerging capital markets and will support healthy and efficient markets, incentivize positive economic behavior among market participants, and reduce information asymmetries that distort the spread between price and value.