Tag Archives: MBS

SEC Complaint on Improper Trading of MBS — Much Ado?

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Floyd Norris, the only journalist to whom I have written fan mail (sorry Gretchen, you’re next), has another interesting column about a case that the SEC has brought against an MBS trader, Jesse Litvak.  The complaint alleges that

On numerous occasions from 2009 to 2011, Litvak lied to, or otherwise misled, customers about the price at which his firm had bought the MBS and the amount of his firm’s compensation for arranging the trades. On some occasions, Litvak also misled the customer into believing that he was arranging a MBS trade between customers, when Litvak really was selling the MBS out of Jefferies’ inventory. Litvak’s misconduct misled customers about the market price for the MBS, and, thus, about the transaction they were agreeing to. Litvak also misled customers about whether they were getting the best price for their MBS trades and how much money they were paying in compensation. MBS are generally illiquid and discovering a market price for them is difficult. Participants trading in the MBS market must rely on informal sources, including their broker, for this information.(1-2)

Norris is right to highlight what this case can reveal about the lack of transparency in the trading of MBS, a lack of transparency that does not exist in many other major secondary markets for securities.

But I was struck by how little is at stake in this SEC case.  The complaint alleges that the misconduct occurred in 25 (count ’em, 25!) trades from 2009 through 2011 (7) and that Litvak’s behavior “generated over $2.7 million in additional revenue for his firm.”  (2)  Not for him personally, mind you, but for his firm!  He, of course, should be punished if the allegations prove to be true.  And yet . . ..

Time after time, the government brings cases against mid-level players somehow involved in the financial crisis.  Time after time, people wonder why these are the best cases that can be brought.  My earlier thoughts about this can be found here and here.  Is it possible that even the SEC lacks the resources to investigate the massively document intensive cases that would get to the heart of the matter?

 

NCUA Sues JP Morgan over MBS Representations

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The National Credit Union Administration has sued J.P. Morgan Securities and Bear, Stearns & Co. for alleged securities laws violations relating to the sale of mortgage-backed securities to 4 credit unions that are now in NCUA conservatorship.  According to the complaint, Bear Stearns (now owned by JPMorgan) made misrepresentations to the purchasing credit unions as part of its underwriting and sales of the MBS.  The press release notes that NCUA has initiated eight similar suits against a variety of financial institutions.

One of the representations at issue states that “a mortgage loan will be considered to be originated in accordance with a given set of underwriting standards if, based on an overall qualitative evaluation, the loan is in substantial compliance with those underwriting standards.” (Complaint paragraph 408, page 170)

Given what we know about a lot of the securities that were issued, it is hard to imagine that reps like this were not violated for many of them.

Retail Trading Comes to Mortgage-Backed Securities

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In a recent paper, Bessembinder et al. look at the implications of FINRA’s proposal to disseminate trade prices for structured products like mortgage-backed securities to the public.  They evaluate how price transparency has impacted the corporate bond market and find that it “increased bonds’ propensity to trade and increased overall volume.”  (24)  They note that trading costs shrank.  They argue that the same impact may be felt in structured product markets.

www.womenslifestyle.ca/media/www/

It is unclear what this change will mean for the homeowner, but it would seem to mean that there will be a reduction in interest expense and an increase in liquidity in the market for credit but perhaps also an increase in the role that “animal spirits” will play as the business cycle inexorably turns from bust to plateau to boom to bust . . ..

SEC 2012 Report on NRSROs

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This SEC staff report has some interesting findings that relate to asset-backed securitizations.  Highlights include

  • The pie charts on page 6 that indicate the overall market share of NRSROs as well as their share by sector.  It is interesting to see that Fitch does significantly better rating Asset-Backed Securities (20%) than it does overall (13%).
  • “In some structured finance rating files, the Staff found incomplete rating recommendations relating to the final tranches and were unable to ascertain what the committee ultimately approved. In some instances, there was no rationale recorded for why the final rating recommendation deviated from the original.” (14)
  • “The Staff found that [one large] NRSRO placed certain European residential mortgage-backed securities tranches on watch for potential downgrades for over two years and failed to review the watch within the timetable specified in its policies. In doing so, the NRSRO failed to follow its policies and procedures with regard to the use of rating watch status and the timeliness of reviews conducted on the rating watch status. The NRSRO also failed to apply new criteria to these transactions within the time period required by its policies.”  (13)

Borden & Reiss: “Beneficial Ownership and the REMIC Classification Rules”

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We just posted “Beneficial Ownership and the REMIC Classification Rules” which can be most easily downloaded here.  It follows up on our previous piece, “Wall Street Rules Applied to REMIC Classification,” which ban be easily downloaded here.