Considering factors beyond credit scores and ratios can help investors forecast loan performance on residential mortgage-backed securities. What’s not helping RMBS investors are new disclosure requirements.
In addition to quantitative factors — such as
credit scores, loan-to-value ratios and debt-to-income ratios — RMBS performance during an economic downturn will be determined by qualitative factors.
Included in qualitative factors is the lack of negative events in the borrower’s credit history. Another such factor is the number of unblemished credit lines as well as explanations for previous late payments.
The findings were discussed in Qualitative Underwriting Factors Differentiate US Prime RMBS.
The report from Moody’s Investors Service indicated that home lenders use these qualitative factors to see beyond the hard numbers.
“These soft measures tell a story about the borrower that helps indicate both ability and willingness to repay the loan,” Moody’s Associate Vice President and Analyst Lima Ekram said in a statement.
The ratings agency cited examples of soft measures such as the presence of a past bankruptcy or foreclosure, which could indicate borrower financial mismanagement.
Another factor is multiple debts, which might suggest successful management of debt.
A additional measure is the amount of time that has elapsed since a credit event because the likelihood of default declines over time. Chase and New Penn were identified as lenders that have requirements for how much times must pass before approving applicants with prior bankruptcies or foreclosures.
But aggregators like PennyMac, Redwood and WinWater won’t even purchase loans to borrowers with previous bankruptcies or foreclosures.
Moody’s said asset reserves are among qualitative factors. The liquidity of reserves
and the borrower’s contribution to the down payment impact the chance of default.
A separate report from the New York-based firm, New TILA-RESPA Rule Will Heighten Possibility of Losses in US RMBS for Rule Violations, said that the new integrated disclosures required by the Truth in Lending Act and the Real Estate Settlement Procedures Act present operational challenges for originators of RMBS loans.
In turn, the scope of erroneous information that RMBS trusts and secondary market purchasers are liable for is expanded.
The TILA-RESPA Integrated Disclosure Rule goes into effect on Aug. 1.
Moody’s explained that loans with uncured errors will have higher expected losses, though securitizations with post-crisis procedures and 100 percent due diligence
will not likely include loans that violate the rule.
“The huge operational challenge for the industry to implement and comply with TRID will likely cause a spike in compliance errors,” Moody’s Vice President and Senior Credit Officer Yehudah
Forster said in a statement.
