Market Overview

Fitch: 'Weak' Reps & Warranties May Expose Investors to 'Defective' U.S. Mortgages

NEW YORK--(BUSINESS WIRE)--

Link to Fitch Ratings' Report: U.S. RMBS 2.0: Reps and Warranties Changing Landscape
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=701847

Recent rep and warranty proposals in new U.S. RMBS deals may expose investors to added risks from weak underwriting and defective mortgage loans, according to Fitch Ratings in a new report. As such, Fitch believes that these weaker proposals need to be accounted for in the credit enhancement where possible.

The rep and warranty framework established post-crisis as part of ASF Project Restart reflects a high standard that provides the most assurances about loan origination and underwriting quality (and have been seen in all deals issued by Redwood Trust so far). These reps contain few knowledge qualifiers, the repurchase obligations are for the life of the loan, and there is little ambiguity.

With some of the most recent RMBS proposals, however, the rep and warranty frameworks contain provisions that Fitch deems weak. For instance, some of the provisions relieve lenders from their repurchase obligations after fewer than 36 months. Others contain proximate clause language and materiality factors in determining if a breach occurred. 'These provisions begin to introduce subjectivity and may burden a mortgage trust with additional risks and expenses,' said Senior Director Suzanne Mistretta.

The balance between protecting both lenders and investors in new RMBS deals requires greater clarity and transparency so that investors remain protected and lenders remain incentivized to make sound underwriting decisions.

The proposals vary widely so each transaction will be approached holistically. 'Transactions with significant third party due diligence and strong credit quality borrowers would provide greater confidence that any future default risk would be driven by credit events and not operational weaknesses,' said Mistretta.

'US RMBS 2.0: Reps and Warranties Changing Landscape' is available at www.fitchratings.com or by clicking on the above link.

Additional information is available at www.fitchratings.com.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings
Suzanne Mistretta, +1-212-908-0639
Senior Director
Fitch Ratings, Inc., One State Street Plaza, New York, NY 10004
or
Rui Pereira, +1-212-908-0766
Managing Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

 

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