Fitch: Improvements Needed in U.S. RMBS Diligence

Fitch: Improvements Needed in U.S. RMBS Diligence

Fitch Ratings, New York, 19 October 2017

The private label U.S. RMBS market should establish a new due diligence working group to drive grading, process and standardization improvements, according to Fitch Ratings in a new report. This was an overriding conclusion and one of several takeaways from Fitch's U.S. RMBS roundtable event held at its New York office earlier this month with leading third party review (TPR) firms.

Fitch's report highlights 12 needed focus areas for the RMBS industry relating to regulatory compliance, the diligence review process and product challenges. High level takeaways from the TPR roundtable include:

  • A working group, perhaps within the Structured Finance Industry Group (SFIG), is needed to help establish industry consensus on current and upcoming due diligence items.
  • The industry could benefit from greater uniformity as grading differences exist among the TPR firms, with much of this due to interpretations of regulatory compliance matters.
  • Reporting and process changes could be implemented to make the due diligence product clearer and easier to use.
  • Uncertainty exists among the TPR firms on how to properly perform due diligence on certain new loan products, including reduced bank statement loans, asset depletion programs, and investor cash flow loans.

This last takeaway is noteworthy since reduced bank statement program loans, asset depletion programs and investor cash flow loans are now making their way into new deals. Not surprisingly, as a result Fitch is taking a more bearish
view on new RMBS containing these types of loans.

"Guidelines for seasoned loan products are not always available and third party firms have differing methodologies for determining compensating factors on loans with exceptions," said Managing Director Roelof Slump. "There is precedence for third party firms and the mortgage industry working together to resolve key issues."

A notable example is what was achieved through the analysis of TILA/RESPA Integrated Disclosure (TRID) related compliance items and publication in June 2016 of SFIG's RMBS 3.0 TRID Compliance Review Scope.

Originators and aggregators of mortgage collateral typically engage TPR firms to conduct loan file reviews and establish the scope of work to be performed (usually in line with rating agency requirements). These firms assign 'event grades' ranging from 'A' to 'D' for borrower credit, property value, and regulatory compliance.

Fitch's RMBS rating methodology for new transactions includes an evaluation of the loan-level diligence review results on all mortgage pools that Fitch is engaged to rate. Based on identified issues with the due diligence scope and/or the results of the TPR review, Fitch may adjust its expected losses for loans in an RMBS transaction. As part of its operational review effort, Fitch conducts reviews of TPR due diligence firms that are actively involved in Fitch-rated RMBS every 12-18 months. Fitch's review of TPR firms is focused on confirming that they have adequate processes and controls in place and are capable of conducting effective due diligence reviews.