PERSON OF THE WEEK: Whether you are talking about transparency in servicing or the future of the secondary market, due diligence and risk management are more than just buzzwords; they're necessities. To get an idea of how these pieces fit together, MortgageOrb.com caught up with Allonhill CEO Sue Allon.
Q: The Office of the Comptroller of the Currency (OCC) recently clarified that all of its regulated servicers, and not just those named in recent consent orders, are to review their foreclosure processes. Several procedural deficiencies, such as affidavit and notarization problems, have long been identified as widespread issues. Do you anticipate other problems will emerge?
Sue Allon: At Allonhill and before that, at Murrayhill, I have had many years of experience working with servicers. Based on that experience, and without reference to the OCC, I know that servicers make mistakes in foreclosures.
For one thing, we have 50 states, each with its own foreclosure laws, and those laws change regularly. To deal with these different laws, servicers have historically retained outside attorneys to process foreclosures, and that introduces into the equation yet another variable that is beyond servicers' control. Foreclosures have always presented challenges in servicing, even before the extraordinary volume of defaults that started to hit soon after the introduction of subprime loans.
Q: How do you believe the servicing flaws that have come to light have affected investor confidence? And what do you believe will be some of the broader ramifications of Bank of America's $8.5 billion settlement with residential mortgage-backed securities (RMBS) investors?
Allon: One effect of the servicing errors that have surfaced is that investors realized they couldn't be sure that the loans in the securitizations they invested in were enforceable. This, in combination with the difficulties surrounding RMBS and investors' inability to gain access to information on defaulted loans, created a black cloud over the industry. Anything that clears up uncertainty is going to help bring the market back to life, whether it is settling long-standing claims, or establishing that servicers' practices are sound and that problems from the past have been resolved.
Q: Are there any lessons to be learned from Home Affordable Modification Program?
Allon: We learned a lot about how to define income in order to qualify people for HAMP. That might seem like a simple exercise, but when you dig into it, there are myriad ways to classify income like tips and foster child support. The list of unusual, difficult-to-document yet legitimate income sources is very long.
We also learned that clarity is best, and any gray areas about how to define income resulted in hesitation and delays. This is good information to guide the securitization process moving forward. Rating agencies and regulators, including the Securities and Exchange Commission (SEC), need to be clear about the rules and what defines a good loan or a bad loan. Otherwise, we will see hesitation and delays in deals coming to market.
Q: In a speech last month, SEC Chairwoman Mary Schapiro identified three areas of securitization reform that are of particular concern to the SEC: a lack of accountability among MBS participants, flawed credit ratings and investors' lack of information necessary to value securities. What types of reforms are crucial to kick-starting private-label RMBS?
Allon: We need to sort out what Freddie and Fannie's role will be in the future. Issuers believe originations won't come back to life broadly until the government-sponsored enterprises' (GSEs) role is more narrowly defined. I see important roles for the GSEs in determining best practices for originations and for servicing, and I hope we don't forget how much groundbreaking work they have done for us in these and other areas. There is no question that we need them, though I believe it is in a role that is defined more as one to facilitate than one to drive the market.
We need to work very hard at defining further the rules for third-party diligence reviews. Without further definition and industry consensus, the SEC's rules don't have the meaning that would bring accountability to the MBS process and participants. By leaving critical points open to interpretation, the third-party diligence firms are put at risk and are being asked to shoulder the burden of providing and enforcing the rules about what it means to review a loan for a securitization.
Right now, we have major banks requiring us to agree to expert status, and others who say that they will not allow anyone but themselves to stand behind their securitizations. We have no standards for diligence firms or for diligence reviews. Investors will have no idea, when they look at a prospectus supplement what it means to have a diligence firm named as expert or not, and they will have no ability to discern whether the diligence firm performed its job at an acceptable standard or not. We can't move forward with securitizations until we get this right.
