Trustee Bond Administration Quality Varies Significantly
Under my direction, the Modeling and Analytics division of Oakleaf Group aggregates published loan level data for RMBS transactions and checks the “waterfall” cash allocation rules that apply to each trust. We have reconciled hundreds of trusts over thousands of remittance months administrated by all major trustees.
Surprisingly, there is significant variation in the performance among the largest Trustees (Wells Fargo, Deutsche Bank, Citibank, HSBC, Bank of New York Mellon, and US Bank). Some RMBS trustees make unexplained cash adjustments to many trusts. By “unexplained” we mean not explained by loan level data provided in their loan level disclosures. The cash that the trustee is applying into the top of the waterfall does not always match the cash reported as available from the loans in the trusts.
Furthermore, the quality of loan level data disclosure varies significantly. Some trustees are transparent, and others are opaque, lacking the transparency needed to trace the flow of funds in and out of the trust. Loan level disclosure varies as much as 60% from trustee to trustee, even though they collect the same data from the servicers and master servicers.
We theorize that some trustees have internal bond administration processes that depart from (or abandon) a loan-by-loan accounting of the cash in the trusts and instead allocate cash using “plugs” or other approximations. In these cases, the trustee seems to be asking investors to trust them, without being able to verify. We wonder whether they are putting more cash into the trusts than is available from loans, putting less cash in, or putting exactly the correct amount in. (What do our readers think? Email me at email@example.com)
But wait. You might ask: Isn’t the trustee supposed to maintain a loan by loan accounting of the cash in the certificate account? They sure are. Consider, for example, this language common in Pooling & Servicing Agreements describing the trustee’s responsibilities: “The Trustee shall keep and maintain separate accounting, on a Mortgage Loan by Mortgage Loan basis, for the purpose of accounting for any payments or reimbursements from the Distribution Account…”.
The trustee certainly has the loan level data from the Servicers and/or Master Servicers. According to the trust documents, the servicer is responsible to provide the trustee with information sufficient for the trustee to perform the calculations necessary to make the distributions to the certificate holders.
The question is: why can we reconcile the flow of the funds for trusts for some bond administrators and not for others? For a trustee that isn’t transparent in their waterfall administration, why should the investment community be comfortable with the trustee’s ability to perform their role as trustee?
Below is an example of the lack of transparency described for select distribution dates for a sample Trust:
We believe that a transparent, auditable bond administration process and associated data disclosure are required by the governing agreements, and also make good business sense. If you have questions about how well a trustee is administering a bond you invest in, or have issued, or have rated, please contact us (firstname.lastname@example.org) to learn more.
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