The importance of timely loan performance information has been discussed extensively on this blog (see the Brown Paper Bag Challenge posts - here, here and here ) and on the TYI, LLC website.
Mortgage-bond buyers are losing faith in the accuracy of remittance reports, and some say the apprehension could soon factor into their investment strategies.
Remittance reports, distributed monthly by securitization trustees, are supposed to provide routine snapshots of the cashflow-collection and distribution activities of servicers.
However, investors say there has been a rash of recent instances in which the reported data differed considerably from what actually happened - making it impossible to determine values for their holdings.
Frustrated with what they consider insufficient efforts by servicers to address the discrepancies, certain buysiders ... are suggesting that flawed remittance reports already have emerged as an obstacle to the mortgage-bond sector. "It's a real mess. I wouldn't be surprised if some investors start moving into other sectors altogether. I know I've been thinking about it," one buyer said. "It's just become impossible to rely on these reports."In Europe, investors, including commercial and investment banks, are required to know what they own under Article 122a of the European Capital Requirements Directive. Clearly, flawed remittance reports would make Article 122a impossible to comply with.
If flawed remittance reports are as pervasive as the article suggests, European investors covered by Article 122a should be be sellers of structured finance securities and shifting their resources to other sectors altogether.
Servicers for private-label mortgage securitizations have always released remittance reports, typically on the 25th of each month. But the documents only began to receive widespread attention as the real estate market unraveled in 2007 and investors sought more details of their deals' underlying loans.
Now, buysiders rely on the information to calculate their own cashflow expectations, much as holders of agency mortgage paper do with pass-through reports.
Many Wall Street Banks also have used remittance data to help set their trading strategies.Prior to and during the credit crisis, many Wall Street banks owned the firms that were doing the daily billing and collecting of the underlying collateral. As a result, their trading areas had access to current loan performance information while investors had to wait until the 25th of each month and the release of the servicer remittance report for loan performance information.
This access to loan performance information gave Wall Street a significant, profitable advantage. An advantage that would disappear under the FDR Framework, where asset-level data is updated on an observable event (like a payment, delinquency or default) basis.
Why have the once-reliable reports been wrong? Investors point in part to increasing use this year of mortgage-modification programs that government agencies and lenders have implemented to aid troubled borrowers. They claim some servicers fail to verify when the changes take effect, resulting in mismatches between when a given loan's cashflows actually shift and when those adjustments are reported.
Servicers argue the volume of recent modifications has become overwhelming in comparison to their staffing levels. They also have faced ongoing struggles in figuring out how to treat loans that are in the trial phases of modification programs. "It has made it nearly impossible for us to appropriately account for changes," one servicing professional said.
Buysiders call that a red herring, saying servicers are equipped to account for modifications as they occur. "The servicers simply don't pay enough attention to what's happening to the underlying loans," one source said.By definition the underlying loan systems are capable of tracking modifications. That is what these databases are designed to do.
No comments:
Post a Comment