Tag Archives: Flagstar

Weaker Reps and Warranties on the Horizon

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Inside Mortgage Finance highlighted a DBRS Presale Report for J.P. Morgan Mortgage Trust, Series 2014-IV3.  This securitization contains prime jumbo ARMS, some with interest only features. So, these are not plain vanilla mortgages.

The report raises some concerns about loosening standards in the residential mortgage-backed securities market, particularly relating to standards for the representations and warranties that securitizers make to investors in the securities:

Relatively Weak Representations and Warranties Framework. Compared with other post-crisis representations and warranties frameworks, this transaction employs a relatively weak standard, which includes materiality factors, the use of knowledge qualifiers, as well as sunset provisions that allow for certain representations to expire within three to six years after the closing date. The framework is perceived by DBRS to be weak and limiting as compared with the traditional lifetime representations and warranties standard in previous DBRS-rated securitizations. (4)

 DBRS noted, however, that there were various mitigating factors.  They included:
Representations and warranties for fraud involving multiple parties that collaborated in committing fraud with respect to multiple mortgage loans will not be allowed to sunset.

Underwriting and fraud (other than the above-described fraud) representations and warranties are only allowed to sunset if certain performance tests are satisfied. . . .

Third-party due diligence was conducted on 100% of the pool with satisfactory results, which mitigates the risk of future representations and warranties violations.

Automatic reviews on certain representations are triggered on any loan that becomes 120 days delinquent, any loan that has incurred a cumulative loss or any loan for which the servicers have stopped advancing funds.

Pentalpha Surveillance LLC (Pentalpha Surveillance) acts as breach reviewer (Reviewer) required to review any triggered loans for breaches of representations and warranties in accordance with predetermined procedures and processes. . . .

Notwithstanding the above,DBRS reduced the origination scores, assigned additional penalties and adjusted certain loan attributes based on third-party due diligence results in its analysis which resulted in higher loss expectations. (4-5)
All in all, this does not sound so terrible. But it is worth noting that the tight restrictions in the jumbo RMBS market appears to be loosening up. As the market cycles from fear to greed, as it always does, it is worth keeping track of each step that it takes toward greed. We can always hope to identify early on when it has taken one step too many.

Rakoff Rules for Monoline Insurer Against Securitizer

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Judge Rakoff ruled for Assured Guaranty against Flagstar and awarded Assured more than $90 million.  The 103 page order is a pretty compelling read as it is a careful review of a battle of the experts and has lots of details about the loans in two Flagstar securitizations.  Some interesting bits:

  • the third-party due diligence providers, the Clayton Group and the Bohan Group, “were only expected to flag issues if something in the loan files appeared ‘ridiculous.’” (18)
  • the court found that many of the loans had “blatant” defects. (75)

Ultimately, the court found “that the loans underlying the Trusts here at issue pervasively breached Flagstar’s contractual representations and warranties.” (91)  The court’s findings may have unexpected relevance to other burning issues coming out of the financial crisis, such as whether these securitizations complied with the REMIC rules.