To motivate investor activity, residential mortgage-backed securities (RMBS) originators, sponsors and issuers should be prohibited from using ‘knowledge qualifiers,’ Digital Risk LLC has advised the American Securitization Forum (ASF).
Knowledge qualifiers are often used in representations and warranties to limit responsibility in situations where the counterparty is aware of misrepresentations. Knowledge qualifiers act as a disincentive to issuers, keeping them from implementing robust risk mitigation policies and procedures, according to Digital Risk, which provided its input as part of the ASF's Project RESTART.
The ASF initiated Project RESTART as a way to develop best practices for transparency, disclosure and diligence in the secondary market.
Further, use of knowledge qualifers shifts the burden to investors, Digital Risk says. The company urges the development of model representations and warranties that can be used to allocate the risk of "defective" mortgage loans between the issuers of the securities and the investors who purchase them.
SOURCE: Digital Risk