Regular readers know that the transparency investors need in order to fully enforce the reps and warranties of each deal is observable event based reporting. Under observable event based reporting, every activity like a payment or delinquency involving the underlying collateral are reported to the investors before the beginning of the next business day.
With observable event based reporting, investors can know what they are buying and what they own.
As a result, they can enforce the reps and warranties for each mortgage that violates the terms of these reps and warranties as soon as the violation occurs.
Mortgage bond issuers that are relieving lenders of some potential liabilities may be exposing investors to additional risks of weak underwriting and defective loans, Fitch Ratings said in a report Wednesday.
Fitch focused on proposals to recast the so-called representations and warranties in private mortgage-backed securities, which are legal testaments to the quality of the assets packaged into a securitization.
Facing billions of dollars in claims over bubble-era mortgages that have caused investor losses, the issuers are trying to provide some degree of protection to lenders in the future, to the extent that investors will allow.
Some rep and warrant provisions in recent residential mortgage-backed securities have provisions that Fitch "deems weak," the rating firm said in a statement.
For example, some of the provisions relieve lenders from demands to repurchase faulty loans after fewer than 36 months, it said.
"The balance between protecting both lenders and investors in new RMBS deals requires greater clarity and transparency so that investors remain protected and lenders remain incentivized to make sound underwriting decisions," Fitch said.