The Association of Mortgage Investors has released a detailed set of ‘guiding principles’ to Congress and regulators for how to overhaul the asset-backed securities market.
The association, which represents an array of investors and asset managers, including the Fortress Investment Group, issued its 10-step outline in a white paper titled ‘Reforming the Asset-Backed Securities Market.’
Among its recommendations, the association says investors, rating agencies and regulators must be provided loan-level information – both at pool underwriting and continuously over the life of a securitization – to evaluate collateral and its expected economic performance. The group also advocates requiring a "cooling off" period when asset-backed securities are offered, so that investors have sufficient time to review and analyze the loan-level data prior to making investment decisions.
Deal documents for all asset-backed and structured finance securities should be made publicly available to market participants and regulators, the association adds.
"Investors provide the capital that makes securitization markets work, yet the lessons learned over the last three years demand greater transparency and empowerment of investors for them to be comfortable buying mortgage products in the future," says Micah Green, who represents the association and is a partner at Patton Boggs LLP.
Investors have learned during the current crisis they have little access to critical information about their mortgage securities investments and have even less influence over the management of those investments, Green adds, saying it is important for the government to consider the policy recommendations of investors.
The Association of Mortgage Investors' white paper also addresses conflicts of interest of servicers that have economic interests adverse to those of investors.
"Where servicers have affiliates that hold second-lien or mortgage pool residual interests, they appear to have been carrying out their loss mitigation duties in ways that delay resolution and thereby maximize the option value of such second-lien or residual interests, often at the direct expense of the senior tranche holders," the paper says. "Investors in asset-backed securities need to know that servicing is being performed in a way that maximizes the present value of the entire collateral pool without regard to such conflicts, and this can only be done if fiduciary duties flow directly from servicers that are sufficiently kept away from such competing economic interests."