Editor: David Reiss
Brooklyn Law School

November 12, 2015

RMBS 3.0 and the Public Good

By David Reiss

The Car Spy

The Structured Finance Industry Group has issued RMBS 3.0: A Comprehensive Set of Proposed Industry Standards to Promote Growth in the Private Label Securities Market. RMBS 3.0 is SFIG’s initiative to reinvigorate the “private label” residential mortgage-backed securities (“RMBS”) market:

In order to improve the RMBS market as the industry moves beyond the legacy of the housing crisis, members must tackle the difficult but critical task of creating standardized representations, warranties and repurchase enforcement mechanisms, and address other integral parts of the RMBS issuance process.

Post-crisis, a very small “RMBS 2.0” market has emerged. A review of RMBS 2.0 practices indicates that post-crisis transactions have utilized varying approaches as investors and issuers continue to explore how to best design the structural elements of an RMBS transaction. In a number of cases, divergence among the various approaches has significantly influenced rating agency decisions and limited investor participation. Most industry participants seem to believe that, without a targeted effort at establishing generally accepted best practices, the RMBS market will continue to reflect disparate standards. (1)

In particular,

By identifying, analyzing, explaining and creating solutions for the legal, operational and risk-related issues that concern post-crisis RMBS industry participants, and presenting the work in a centralized, user-friendly manner, RMBS 3.0 seeks to:

1. Create standardization where possible, in a manner that reflects widely agreed upon best practices and procedures.

2. Clarify differences in alternative standards in a centralized and easily comprehendible manner to improve transparency across RMBS transactions.

3. Develop new solutions to the challenges that impede the emergence of a sustainable, scalable and fluid post-crisis RMBS market.

4. Draft or endorse model contractual provisions, or alternative “benchmark” structural approaches, where appropriate to reflect the foregoing.

While SFIG cannot create legally enforceable standards, we strongly believe that the adoption of a set of common standards that are driven by industry participants will be more successful than those dictated by regulation. The project also aims for increased transparency in the practices of participating members. Accordingly, we encourage issuers to either adopt one or more of the “alternative benchmark” RMBS 3.0 standards or utilize alternative approaches in a manner that increases transparency and promotes a better functioning marketplace. (1-2)

Given the rotten state of the private label market, this is an important attempt at self-regulation by this trade group. The push for transparency is, of course, important for investors. They must have confidence in what they are buying if the RMBS market is to grow.

But these decisions will also have impacts on homeowners. For instance, the scope of “materiality” in the context of a fraud representation could impact lender behavior at origination. The public does not have an opportunity to provide input on these model representations. Perhaps it should.

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