Tuesday, September 11, 2012

Triaxx information technology shows buy-side capable of analyzing loan-level data

In her NY Times column, Gretchen Morgenson talks about Triaxx, a NY-based investment manager, and its information technology to identify mortgages that were falsely represented when they were included in structured finance securities.

Regular readers know that the sell-side has been fighting against bringing transparency in the form of observable event based reporting to structured finance.  One of their core arguments against observable event based reporting has been that the loan-level data will overwhelm investors and they are not capable of assessing this information.

Logic suggested that this argument was false.  Since there was a great deal of money to be made, the buy-side had an incentive to invest in information technology that would allow them to assess this loan-level data.

Triaxx confirmed this logic and showed the sell-side argument was false by investing in and building an information system to assess mortgage-level data.  Their system identifies mortgages that were misrepresented in the existing RMBS deals.  Presumably, this system could also be used to assess new RMBS deals.
IT sounds like the Domesday Book of the housing bust. In fact, it is a computerized compendium of millions of housing transactions — a decade’s worth from across the country — that could finally help us get to the bottom of troubled mortgage investments. 
The system is an outgrowth of work done by a New York investment manager, Thomas Priore. In the boom years, his investment firm, ICP Capital, navigated the dangerous waters of collateralized debt obligations via an investment vehicle called Triaxx. Buyers of Triaxx C.D.O.’s did better than most, but Triaxx still incurred losses when the bottom fell out. 
Now Triaxx’s database could help its managers and other investors identify bad mortgages and, perhaps, learn who snookered whom when questionable home loans were bundled into investments that later went bad. 
Triaxx’s technology came to light only last month, in court documents filed in connection with the bankruptcy of Residential Capital. ResCap was the mortgage lending unit of GMAC, now known as Ally Financial. 
As an investor in mortgage securities, Triaxx gained access to a lot of information about loans that were pooled, including when those loans were made, where the properties are and how big the mortgage was, relative to the property’s value. After Triaxx fed such details into its system, dubious loans popped out....
But he did say that, looking ahead, he believed that Triaxx’s technology would help its investors recover money they deserved. Many other investors, unable or unwilling to dig through such data, have settled for pennies on the dollar. 
“Our hope is that the technology will level the playing field for mortgage-backed investors and provide a superior method to manage residential mortgage risk in the future,” Mr. Priore said.....
When combined with observable event based reporting, investors should be able to know what they own.
ResCap replied that it would be a herculean task to examine the loans in the trusts to determine the validity of each investor’s claims. 
But Triaxx noted that it took only seven weeks or so to do a forensic analysis of the roughly 20,000 loans held by the trusts in which it is an investor. Of its investments in loans with an original balance of $12.8 billion, Triaxx has identified approximately $2.17 billion with likely breaches....
John G. Moon, a lawyer at Miller & Wrubel who represents Mr. Priore’s firm, said: “Large institutions have been able to hide behind the expense of loan file review to evade responsibility for this very important national problem that we now have. Using years of data and cross-referencing it, Triaxx has figured out where the bad loans are.”
Triaxx, for example, said it had found loans that probably involved inflated appraisals.....  
Triaxx’s system also points to loans on properties that were not owner-occupied, a breach of what investors were told would be in the pool when they bought it, Triaxx’s filing said.... S 
The technology also kicks out mortgages on which borrowers failed to make even their first payments, loans that should never have wound up in the pools to begin with. 
Although Triaxx is using its technology to try to recover losses, that system could also help investors looking to buy privately issued mortgage securities. After all, investors’ inability to analyze the loans in these pools during the mania led to enormous losses in the collapse. 
Now, deeply mistrustful of such securities, investors have pretty much abandoned the market.
There is a buyers' strike.
Lenders and packagers of mortgage securities will undoubtedly fight the use of any technology like Triaxx’s to identify questionable loans.
After all, they make money from opacity that allows them to sell questionable loans as if they are prime mortgages.
That battle will be interesting to watch. But investors should certainly welcome anything that brings transparency to this dysfunctional market.

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