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US lenders may have to take back bad mortgage debt

New proposals by an American think-tank may see US firms having toxic mortgage asset returned to them.

The American Securitization Forum has proposed radical new measures to help fix the moribund US securtisation market, which include lenders having to take back defaulting mortgages.

ASF deputy executive director Tom Deutsch says warranties are used to allocate the risk of defective loans among originators, issuers and investors. As a result, much like a defective product is returned to a shop from which it was sold, a defective mortgage loan can theoretically be returned to the issuer through a repurchase out of a securitisation.

He says: “Many market participants, including investors and rating agencies, believe that the representations and warranties in previous transactions and their related repurchase provisions have not effectively aligned incentives of originators and investors to produce the highest quality loans.”

The forum has also proposed changes to the current rating system of residential mortgage backed securities. It says it wants to enable investors to more easily compare loans and transactions across all issuers and perform necessary analysis to evaluate RMBS transactions by using loan-level detail as standard.

In an attempt to make loan-level assessment standard, ASF is partnering with Standard & Poor’s Fixed Income Risk Management Services, the agency’s analytics unit, to implement a mortgage loan identification system and mortgage loan database. It says that by assigning an identification number to each loan at origination, investors, credit rating agencies and other market participants will be able to track the performance of each loan throughout its life.

Deutsch says: “The mortgage loan database will provide a comprehensive repository for critical mortgage loan data for investors, credit rating agencies and regulators.”

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