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The American Securitization Forum (ASF) recently released the ASF Model RMBS Repurchase Principles, which were designed to align the incentives of originators with those of investors in residential mortgage-backed securities (RMBS).
[IMAGE]The ASF Model RMBS Repurchase Principles deal specifically with maintaining skin-in-the-game through representations and warranties and the enforcement of those representations and warranties.
While ASF believes risk retention can help align incentives, it believes the risk retention rules proposed by regulators ""are not sufficiently tailored to the various asset classes that are securitized and will likely cause a host of negative unintended consequences,"" according to the ASF release announcing the new principles.
ASF argues that the risk retained in representations and warranties involve more skin-in-the-game than Dodd-Frank's 5 percent risk retention proposal. A repurchase requires 100 percent of the loan's unpaid principal.
[COLUMN_BREAK]""Without exception, our originator, issuer and investor members view appropriate representations and warranties and effective enforcement provisions as significant risk retention for RMBS transactions,"" the ASF states.
According to ASF, when a mortgage loan is sold into a securitization trust, it comes with representations and warranties ""relating to the mortgaged property securing the loan, the documentation for the loan, the manner in which the loan was originated and its compliance with applicable law.""
If the loan is in violation of these representations and warranties, it can be returned ""[m]uch like a defective product would be returned to the store from which it was sold.""
The ASF also addressed investors' concerns that most existing securitization contracts do not specify how repurchases may be pursued nor how breaches in the contract are to be determined.
The ASF Model RMBS Repurchase Principles call for an ""independent reviewer"" to review the loan files and make a recommendation to the trustee as to whether a repurchase or substitution should be pursued.
In its release, the ASF states its principles are aligned with specifications released by the Securities and Exchange Commission in late-July.
Both proposals call for an independent review, resolution that involves mediation or arbitration if necessary, and guidelines ""to facilitate direction of trust actions by investors.""
