The Securities and Exchange Commission uncovered a number of compliance issues at the credit rating services in 2013, according to a report released by the federal regulator at the end of December. However, compliance is improving compared with previous exams conducted by the SEC. In exams covering rating activity in 2013, the SEC found issues ranging from conflicts of interest to adherence to policies for reviewing credit ratings to the use of affiliates or third-party contractors. The SEC didn’t single out any of the rating services other than to note whether an issue occurred at one of the big three rating firms or at one of several smaller rating services. For example, the SEC said...

The Basel Committee on Banking Supervision recently proposed replacing credit ratings with loan-characteristic metrics for determining capital requirements on bank holdings of residential MBS and commercial MBS. Federal regulators in the U.S. note that the proposal is preliminary and any changes to U.S. capital requirements will go through a notice and comment process separate from the BCBS’ activity. The current standardized approach established by Basel for determining capital requirement riskweights prescribes the use of external credit ratings for residential MBS and commercial MBS, among other holdings by banks subject to capital requirements. “While acknowledging that credit rating agencies play an important role in financial markets and that external credit assessments provide valuable information that may assist in the analysis of credit risk exposures, the hard-wiring of external credit assessments into standards, laws and regulations may often lead...

As the share of investors purchasing homes declines, mortgage financing continues to take market share from cash financing for home purchases, according to the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey. Non-cash financing was used on 72.4 percent of home purchases in November, based on a three-month moving average. That’s up from a 70.7 percent share in November 2013 and a share as low as 66.9 percent in March 2012. Prior to the housing crisis, the non-cash share of total home sales averaged...

Supporters of the non-agency residential MBS market will have plenty of heavy lifting to do next year, as they face an anticipated increase in volatility for some deals and a continued dominating presence in the broader market by Fannie Mae and Freddie Mac, among a host of challenges. But at least there’s some degree of regulatory certainty for the market now, and it’s likely that opportunities will emerge for savvy investors to snap up some extra yield, according to a consensus of Wall Street analysts who cover the space. Analysts at Fitch Ratings expect to see the continuation of a slow recovery for the non-agency MBS space in 2015. “The recovery in primary U.S. RMBS issuance remains anemic as the industry continues to face challenges including continued government-sponsored enterprise dominance, more attractive financing alternatives such as whole-loan sales, new mortgage regulation, and a weak AAA investor base,” Fitch analysts said in a 2015 outlook piece. Also, despite the industry’s renewed efforts led by the Structured Finance Industry Group to resolve the absence of necessary structural reforms after the financial crisis, progress is...

Democrats in Congress and consumer advocates remain concerned about tight underwriting standards for mortgages, particularly due to overlays established by lenders. However, at a hearing this week by a subcommittee of the Senate Committee on Banking, Housing and Urban Affairs, there was a lack of consensus on what causes underwriting overlays. “Instead of matching the creditworthy borrower at the lower end of the distribution with affordable loans, these borrowers are being cut out of the market entirely,” said Sen. Robert Menendez, D-NJ, chairman of the Banking Subcommittee on Housing, Transportation and Community Development. Sen. Elizabeth Warren, D-MA, suggested...

Non-agency MBS backed by nonperforming mortgages that include a program manager benefit from the unique oversight provided by the manager, according to Moody’s Investors Service. However, there are concerns that in some instances the program manager’s interests may conflict with those of senior bondholders. Moody’s said program managers typically set performance targets and monitor servicers’ progress at the loan level, adopt foreclosure strategies that reduce timelines and expenses and direct servicers’ loss mitigation strategies. The managers are more common on non-agency MBS backed by nonperforming loans than on non-agency MBS backed by newly originated mortgages. Program managers are...

Seven years after the financial crisis, market demand for non-agency residential MBS remains feeble, at best – mostly because of higher yields elsewhere, convexity risk concerns, bond liquidity and pricing and missing structural reforms, industry participants say. “Even with the modest amounts of RMBS issuance that we’re seeing, the market is still struggling to digest those securities. We saw that last year and in the beginning of this year. So the question is: what’s driving that lack of demand?” said Rui Pereira, managing director at Fitch Ratings, during a panel discussion at a residential MBS reform symposium sponsored by the Structured Finance Industry Group and Information Management Network in New York City last month. In advance of the public discussion, Pereira queried...

The FHA and Ginnie Mae will share in the record-setting $16.7 billion settlement between Bank of America, the Department of Justice and certain other federal agencies and six states to resolve claims related to mortgage fraud and toxic mortgage-backed securities. The FHA will receive approximately $800 million and an undisclosed amount for consumer relief from BofA. The bank was accused of falsely certifying poorly underwritten loans for FHA insurance, resulting in huge losses for the agency. It is unclear how much Ginnie Mae’s share would be from the settlement. “As a direct endorser of FHA-insured loans, Bank of America performs a critical role in home lending,” said U.S. Attorney Loretta Lynch for the Eastern District of New York during the announcement of the global settlement in August. “In obtaining a payment of $800 million and sweeping relief for troubled homeowners, we have not ...

The most significant blockages to the return of a healthy and sustainable non-agency residential MBS market in the United States are low volume issuance, regulation, weak AAA demand and missing structural reforms, according to top market professionals. “What’s holding back the recovery?” asked Rui Pereira, managing director at Fitch Ratings, during a panel discussion at a residential MBS reform symposium sponsored by the Structured Finance Industry Group and Information Management Network in New York City earlier this month. “Other sectors have rebounded and we’re starting to see new asset classes emerge. And yet, we’re seeing very little momentum in our market. So the question is, what’s stalling the RMBS recovery?” In the run-up to the discussion, Pereira polled...

Wells Fargo is not expected to take new bids – at least anytime soon – on a highly delinquent $39 billion non-agency servicing portfolio that Ocwen Financial failed to buy because of all the regulatory scrutiny the nonbank is facing. However, servicing advisors who have seen some of the details on the portfolio contend that Wells may eventually try to unload the package next year, but is by no means under the gun to do so. “One thing you have to keep in mind is...