RMBS Transparency Enhanced in SEC Disclosure Rule, According to Moody’s

Beginning on June 15, 2015, the US Securities and Exchange Commission’s (SEC) rule 15Ga-2 takes effect for new residential mortgage-backed securities (RMBS), according to Moody’s Credit Outlook Report. The rule is intended to provide transparency into the credit quality of mortgage loans underlying transactions.

The rule will require issuers or underwriters of asset-backed securities (ABS) that nationally recognized statistical rating organization rate to publish the findings and conclusions of any third-party review (TPR) firms’ due-diligence reports on loan quality.

“The SEC’s Rule 15Ga-2 will improve investors’ ability to assess the risk in the assets that back the transactions,” Moody’s said. “Prior to the rule becoming effective, issuers and underwriters typically kept loan-level TPR findings private and made them available only to rating agencies while providing a summary of the findings to investors.”

If the reports are consistent with what issuers provided to rating agencies previously, investors in prime jumbo RMBS will be able to view reports that include pertinent information.

Reports will include:

• Credit reviews that assess the extent to which the loans in the transaction conform to the originator’s lending guidelines.
• Property valuation reviews that assess whether information in the loans’ files reasonably support the loans’ appraised values.
• Compliance reviews that assess whether the loans were originated in accordance with federal, state and local laws.
• Data integrity reviews that assess whether the data provided by the issuer is the same as the information in the loan files.

According to Moody’s, issuers are entrusted to come up with their own formats for summary reports that will comply with rule 15Ga-2. The report’s quality of TPR information will vary across transactions.

“Over time, these variances should diminish as due diligence reports become more standardized as investors provide feedback to issuers,” Moody’s reported. “Some issuers may remove detail from their reports now that they will be more broadly distributed, in an effort to reduce their potential legal liability.”

The reports should not rule out information that would help rating agencies form a credit opinion and any deletions are likely to consist of redundant data or borrower personal information. Deleted redundant data might include data that are available from loan data tapes, TPR firms’ own internal flags or codes, and data that are available on other reports.

“If, however, an issuer makes more material omissions that make it more difficult to assess loan quality, the added uncertainty could mean that the transaction would need more credit enhancement to achieve particular ratings,” Moody’s said.  “We would likely decline to rate a transaction if, in an extreme case, we thought that the information an issuer provided was insufficient for us to analyze the loans’ risk.”

Click here to view Moody's Credit Outlook.