Monday, November 9, 2009

SEC Grows Its Risk Oversight Division

The Securities and Exchange Commission announced on Thursday (10/05/09) the appointment of a new senior policy maker and two counsels to the new Division of Risk, Strategy and Financial Innovation. The senior policy advisor to the division will be Richard Bookstaber, a published author on risk management and finance, who has a Ph.D. in Economics from MIT and has previously held senior positions in risk management at Salomon Brothers and Morgan Stanley. Joining him in counsel roles are Adam Glass, formerly head of structured finance at the law firm of Linklater LLP, and Bruce Kraus from Willkie Farr & Gallagher LLP.


The division was established to perform all of the functions previously performed by Office of Economic Analysis and the Office of Risk Assessment, along with other functions to “provide the Commission with sophisticated analysis that integrates economic, financial and legal disciplines. The division's responsibilities cover three broad areas: risk and economic analysis; strategic research; and financial innovation.” This means that the division will be responsible for: (1) providing strategic and long-term analysis; (2) identifying new developments and trends in financial markets and systemic risk; (3) making recommendations as to how these new developments and trends affect the Commission's regulatory activities; (4) conducting research and analysis in furtherance and support of the functions of the Commission and its divisions and offices; and (5) providing training on new developments and trends and other matters.

The Risk, Strategy and Financial Innovation division is currently headed up by director Henry Hu, a University of Texas School of Law Professor who was appointed in September of this year. Professor Hu holds the Allan Shivers Chair in the Law of Banking and Finance at the University of Texas School of Law and has written on bank, derivatives, hedge fund, and mutual fund regulation, corporate governance, global competitiveness of U.S. derivatives markets, model risk, risk management, and swaps and other financial innovations. More recently, Professor Hu was the lead author on a series of pioneering articles on the "decoupling" of debt and equity, its impact on corporate and debt governance and world systemic risk, and possible disclosure and substantive responses, as stated in the SEC press release of Mr. Hu’s appointment.

Friday, November 6, 2009

New Fannie Mae Program May Have Gotten It Right - The D4L Program

Under a program announced on Thursday (10/5/09) by Fannie Mae called Deed for Lease, qualified borrowers would be able to remain in their residences by signing a lease voluntarily transferring the property deed back to the lender. The new program is designed for borrowers who do not qualify for or have not been able to sustain other loan-workout solutions, such as a modification. Under Deed for Lease, borrowers transfer their property to the lender by completing a deed in lieu of foreclosure, and then lease back the house at a market rate.

To participate in the program, borrowers must live in the home as their primary residence and must be released from any subordinate liens on the property. Tenants of borrowers in this circumstance may also be eligible for leases under the program. Borrowers or tenants interested in a lease must be able to document that the new market rental rate is no more than 31% of their gross income.


Naturally, there is a small catch - Pets. “Certain pets may pose a liability threat to the tenant and the landlord,” Fannie Mae said. “For this reason we may require tenants with pets to secure renters insurance, which includes liability coverage for pets and names Fannie Mae as an additional insured.”

Does that include goldfish?

Wednesday, November 4, 2009

TOO LITTLE, TOO LATE

From HousingWire.com - All that needs to be said is - "Hey the horse is already out of the barn. Now all they are trying to save is the hay." With a 7.5% credit enhancement for prime securitizations, it should be interesting to see what they will be requiring for others.

S&P Makes High Ratings ‘More Difficult’ to Receive


By DIANA GOLOBAY

November 4, 2009 10:58 AM CST

Recent changes among ratings criteria at Standard & Poor’s represent “significant” repercussions for collateralized debt obligations (CDOs) and residential mortgage-backed securities (RMBS), according to the ratings agency.

The changes will make high ratings on securities in sectors troubled by poor credit performance “more difficult” to receive, S&P said. The changes aim to enhance the comparability of ratings on these securities with ratings on credits in other sectors.

“More than any other kind of institutional change, changes to criteria directly affect our credit analysis and our ratings that result from that analysis,” S&P said. “Indeed, criteria is the exact spot where the rubber meets the road for a rating agency. By reading our criteria, investors can gain a deep understanding of the nature and levels of risk expressed in our rating opinions.”

The ratings agency recently adopted stress scenarios for use as a tool to calibrate criteria, meaning assigned ratings ought to be able to withstand higher levels of economic stress without defaulting. The recent weak performance of CDOs and RMBS prompted S&P to revise its criteria in order to improve rating performance and comparability.

The new US RMBS criteria establish a 7.5% credit enhancement level for a security backed by an “archetypical” prime mortgage pool in the triple-A rating category, a “substantially higher” level than previously established. The ratings agency said some RMBS risk features like low borrower credit scores or slim home equity not accounted for in the “archetypical” scenario could trigger adjustment mechanisms in the criteria to allow for higher credit enhancement levels.

S&P indicated the implementation of the new RMBS criteria resulted in few downgrades, since many outstanding RMBS deals already faced downgrades over poor performance.

The ratings agency also updated the corporate CDO criteria to add both qualitative and quantitative tests to a default simulation model already in place. The model addresses the loans or bonds backing a CDO from a mathematical framework, calculating probably behaviors and statistics. The tests added to the model addresses the “model risk” inherent in a probability-based model, S&P said.

“In addition, we recalibrated the simulation model to achieve stresses based on Depression-era experience,” S&P added. “The calibration method that we used makes it easier and more transparent for investors to understand our ratings and to relate them to their investment objectives.”

Write to Diana Golobay.

Tuesday, November 3, 2009

Foreclosures and State Attorney Generals

The recent 5-to-4 Supreme Court decision in June which allows states to exercise their own rights against banks and their actions with respect to foreclosures has changed the landscape with respect to the enforcement of rights by the securitization trusts to foreclose on defaulted loans and the pressures now be put on banks by various state attorney generals.

If you remember back, it was the state attorney generals in the early 2000s that took down the behemoth mortgage company Ameriquest. While individually one state attorney general could do little against such a massive enterprise, once they ganged together, even the company that Roland built could not withstand the pressure, paying upwards of $350M to settle the cases.

Now, with this new federal decision as support, the New York Times reported today that frustration by the attorney generals of several states has resulted in a movement towards litigation against the banks. From that article in the New York Times, the Arizona Attorney General Terry Goddard stated "We tried to use the tool to be persuasive with the banks . . . But their waterfall of excuses, the abysmal numbers of modifications, tells us persuasion is not working."

It appears that the State attorney generals will consider using the theory that the banks perpetrated a massive fraud on consumers by offering exotic loans that the borrower could not understand nor could repay. In a prior related matter, Fremont Reorganizing Corporation, formerly Fremont Investment & Loan, settled its case brought by Massachusetts Attorney General Martha Coakley, which claimed, in so many words, predatory lending practices. (See COMMONWEALTH OF MASSACHUSETTS, Plaintiff vs. FREMONT INVESTMENT & LOAN, and FREMONT GENERAL CORPORATION, Defendants).This followed a settlement with Goldman Sachs for its role in securitizing subprime loans, including subprime loans originated by Fremont and a preliminary injunction against Option One and its parent H&R Block.

These actions will probably be a road map for further litigation to be brought against the mortgage companies, banks and investment banks that offered these loans.

The one question that these Attorney Generals need to ask in order to help in these litigations is "why" . . . why would the banks be more willing to foreclosure on a loan rather than modify the loan?

Securitization Public Offering Disclosure Attack

Dora Bank Puerto Rico, a Puerto Rico-based bank, filed a lawsuit against Washington Mutual Acceptance Corporation and WaMu Capital Corporation, two Washington Mutual subsidiaries that are participants in the Washington Mutual securitization programs. The law suit alleges that these two entites, which were responsible for the disclosure of information in the public offering documents of the securitization, didn’t properly disclose information relating to the underwrigint standards practiced by WaMu.

The suit was filed in the U.S. District Court, Western District of Washington

Since the sale of WaMu to JPMortgage Chase & Co. last year was an asset sale, it may be that this liability will have to be fought in bankruptcy court since the bank’s holding company is in bankruptcy.

According to the suit, WaMu issued securities backed by WaMu branded residential "Option ARM" (also called "pick-a-payment" mortgages) “whose interest rates adjusted (after an initial fixed rate period) and included a negative amortization feature.” The pass-through securities issued in the securitization trusts, however, began to experience significantly higher rates of default.

“Following the issuance of the certificates, disclosures began to emerge revealing the routine disregard for the guidelines in mortgage loan origination of the collateral underlying the certificates,” the suit alleges.

This will stand as a test case as to whether adequate disclosure was provided in the Prospectus and Prospectus Supplements with respect to Underwriting Standards and the exceptions thereto.

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SASA provides complete analysis of regulatory and contractual obligations of securitized assets. Originator, Depositor, Master Trustee/ Trustee and Servicer requirements "Mapped and Tracked." Go to http://www.assetback.net

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