September 26, 2014
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)
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. . . .