Tuesday, February 8, 2011

SEC's Investigation of Structured Finance Should Lead to Requiring Current-Asset Level Disclosure

For the last several months, the SEC has been working on revising its disclosure requirements for structured finance securities.

Yesterday, the Financial Times reported that the SEC has begun investigating whether investors in mortgage-backed securities were misled.

Will the findings of this investigation help to shape the final revision of the disclosure requirements?

Your humble blogger hopes so, since one of the major findings will be that if investors had access to current asset-level data, much of what went on from late 2006 through early 2008 would not have occurred.

Investors with access to current loan-level data could have done their own analysis to see if the representations and warranties matched up to the actual performance of the individual loans.  Investors with access to current asset-level data would have purchased significantly less of the mortgaged-backed securities and related CDOs.

As the FT reported,
US securities regulators investigating the role of banks in the mortgage crisis are homing in on the question of whether investors were misled about the home loans used to back securities. 
... Kenneth Lench, chief of the SEC’s structured products unit, said at a conference in Washington on Friday that issues of interest to the commission include whether investors were properly informed about underwriting and foreclosure practices and the quality of mortgages used to back securities. 
... While declining to discuss any investigations, Mr Lench highlighted areas that could be of concern: “Were representations relating to the transfer or documentation of mortgages into the loan pools accurate? Did activities such as ‘robo-signing’ contradict those representations? Were disclosures to investors regarding the quality of the loans in the pools accurate?” 
The same issues are playing out in private lawsuits filed in courts around the country in an attempt to get banks to repurchase faulty home loans. 
In those suits, investors contend that some loans that were packaged into mortgage-backed
securities failed to meet underwriting guidelines.
... In one of the highest profile disputes, a group of investors including the Federal Reserve Bank of New York and Freddie Mac, the government-owned mortgage finance company, is pressing Bank of America to settle claims that it breached representations and warranties with respect to loans underlying certain mortgage-backed securities. 
... Mr Lench said his unit was working with “legacy” cases from the financial crisis as well as new ones stemming from the “rippling effect of the unfolding crisis”.

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