In the last two years, originators have been taking the precautions that many of them did not take prior to the crisis with residential mortgage-backed securities, according to Fitch Ratings’ Inaugural U.S. RMBS Third-Party Review Update released Monday.
Fitch's report on 11 independent third-party reviewers found "strong" due diligence on recently-originated loans contained in securities.
Loans originated post-crisis were found to be “exceptional” in quality and featured no worse than non-material issues when Fitch’s due diligence criteria was applied, Fitch reported. Nearly all Fitch-rated RBMS collateralized with loans originated post-crisis received A or B grades.
Reperforming loans originated pre-crisis contained more material issues, according to Fitch.
Third-party reviewers compare reported loan-level data against the information contained in the loan file, compare the loans in the sample with underwriting guidelines, ensure that the underlying property is supportable, and check to ensure that the laws were originated in compliance with all laws and regulations, according to Fitch. Two recent areas of focus with regard to compliance in origination have been the Ability-to-Repay rule and the TRID rule.
“For recent RPL transactions, examples of 'C-D' grades include missing required disclosures such as the note, mortgage, truth in lending, and final HUD1s,” said Amit Arora, Director, RMBS at Fitch Ratings. “The few 'C-D' grades on recently originated loans are generally related to the initial TRID loan reviews not yet incorporated into Fitch criteria and market participants not having a clear approach to cure the TRID exceptions.”
Arora continued, “Due diligence on recently originated loans generally reflect solid operational controls and post-crisis industry improvements in policies and procedures.”
In all, Fitch designated 12 third-party reviewers as “acceptable.” Third-party reviewers involved active in new Fitch-rated RMBS are Adfitech, American Mortgage Consultants, Clayton Holdings, Digital Risk, IngletBlair, and Opus Capital Markets. Fitch reviews third-party due diligence firms that are actively involved in Fitch-rated transactions every 12 to 18 months; all the aforementioned firms received acceptable ratings.
Those that received an acceptable rating and are not involved in Fitch-rated transactions but are actively involved in reviewing newly-originated residential mortgage loans are the Barrent Group, Covius Real Estate Services, Edge Mortgage Advisory Company, Infinity Internal Processing Services, and Mission Global Capital Services.
The report included more than 100,000 residential mortgage loans contained in 92 securitizations for which Fitch has received ratings since 2014. Click here to view the complete report from Fitch.