NEWS ANALYSIS: Improving Loan Transparency

best methods for improvement remain up for debate[/b], but few in the mortgage and investment communities would contest the reality that a lack of mortgage loan transparency and due diligence contributed – at least to some degree – to the global financial crisis. ‘The nature of the securitization process has made it extremely difficult to determine and follow losses and increasing risk from one tranche and pool to another, and to reach the information about the original borrowers that is needed to estimate future cashflows and price,’ said Kenneth E. Scott and John B. Taylor in a recent Wall Street Journal opinion article. ‘Securitization was maddeningly complex. Mandated transparency is the only solution,’ wrote the authors, who are both Stanford University professors and fellows at the Hoover Institution. Now, with the focus on healing the markets and preventing future catastrophes, Standard & Poor's Fixed Income Risk Management Services (FIRMS) has teamed up with the American Securitization Forum (ASF) to roll out a loan-numbering identification program and an accompanying central mortgage repository. The initiative, which the creators expect will create a ‘chain of accountability between loan originators and investors,’ assigns a unique Loan ID and links it to the CUSIP and ISIN number of a security in order to make tracking easier throughout the loan's life span. FIRMS and ASF point out that this new ID does not replace a servicer's primary loan key. Rather, the ID is intended to create consistency and make monthly reporting easier when a loan changes servicers or is otherwise shifted among different entities after securitization. ‘We see this partnership with ASF as a critical turning point toward greater transparency into the individual loans that make up the mortgage- and asset-backed securities markets,’ David Goldstein, managing director of FIRMS, stated in the program announcement. Meanwhile, specialized efforts are under way to improve transparency in the cataleptic commercial mortgage-backed securities (CMBS) market. Although it has yet to release comment on the FIRMS/ASF program, Commercial Mortgage Securities Association (CMSA) released a white paper this week emphasizing the need to pay heed to this market's unique needs and attributes when sweeping financial-reform and disclosure initiatives are introduced at the broader level. For instance, there are typically 100 to 300 commercial loans in a pool that support a CMBS bond, in contrast to the tens of thousands of loans in a residential-mortgage equivalent. According to the association, this limited number of loans permits market participants to gather detailed information about properties, cashflows, tenants and borrower quality. ‘CMBS market participants have access to loan-, property- and bond-level information at issuance and while securities are outstanding through the CMSA Investor Reporting Package (IRP), as well as through other third-party sources that provide access to the financial underpinnings of the securitized commercial loans and their ongoing performance,’ the group points out. The CMSA IRP is now being used as a reference model for the residential asset-backed securities market, as well as for the European CMBS market and the Japanese CMBS market. Furthermore, certain types of loan-level information are considered confidential and proprietary, CMSA says, and disclosing these data – as proposed by current regulatory reforms – would violate securities


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