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Strengthening the underlying loan manufacturing process and diversifying this risk in the secondary market remain critical to ensuring the integrity of the market.
September 5 -
Congress must create mechanisms to dampen the volatility of housing finance, writes James Lockhart, the former regulator for Fannie and Freddie, on the fifth anniversary of their takeover by the government.
September 9
Investors are likely to say "fool me once " which may explain why the volume for newly issued private label residential mortgage securitizations is a fraction of what it was a few years ago. Through bitter experience, bond purchasers learned about the moral hazard embedded in private RMBS and their grossly inadequate legal protections.
"The private RMBS market was at the heart of the financial panic and the Great Recession that followed,"
More pointedly, the heart of the financial panic and the Great Recession that followed was an epidemic of fraud and sloppy recordkeeping facilitated by the originate-to-distribute model for private RMBS. Parties complicit in fraud borrowers, mortgage brokers, originators, rating agencies, investment banks and servicers calculated that the odds of being held fully accountable were close to nil. That assessment has stood the test of time.
How bad was the fraud? The
Consider what
But U.S. Bank could not review every loan file. Remember, reps and warrants which traditionally claim that no document in connection with the transaction contains untrue statements of material fact have been used as the primary source of legal comfort that the seller stands behind the purported accuracy of loan files in a pool of 2,000 mortgages.
However, to get access to the loan files, investors generally need to attain a certain percentage of votes among investors, and that takes time and lobbying. And then it takes time to actually review the files. Both
The current owner of Countrywide, Bank of America, rejected the notion that aggrieved investors might be able to review loan samples for 530 other Countrywide deals, which were originally worth $424 billion and are now expected to lose about
B of A calculates the average Countrywide defect rate to be
As for seeking recourse under federal securities laws, RMBS investors face daunting challenges. To bring a lawsuit, a plaintiff needs to show what statements in the public disclosures were false or inaccurate within three years of the initial offering. But, once again, it's frequently hard to get access to incriminating loan data.
Poor record-keeping by all parties also provides barriers to pursuing and winning litigation. And how bad was recordkeeping? Nevada's experience suggests that it was really bad. Once the state passed a
Two RMBS investors, Fannie and Freddie, were fortunate, because their regulator could access data more easily, and because
If Washington wants to reform housing finance, it should bolster investor protections by extending statutes of limitations for securities fraud, and by mandating greater investor access to loan files related to any mortgage default.
David Fiderer has previously worked in energy banking for more than 20 years. He is currently working on a book about the rating agencies.