Joe D’Urso: Investors Still Lack Confidence In PLS Market Due To Enforcement Concerns

Posted by Patrick Barnard on January 15, 2015 No Comments
Categories : Person Of The Week

PERSON OF THE WEEK: Joe D'Urso is president of Clayton Holdings, a provider of loan review and due diligence, consulting, loan surveillance, and staffing, recruiting and outsourcing services, as well as commercial services. MortgageOrb recently interviewed D'Urso to learn more about the recent changes coming out of the firm's recent merger with Radian as well as how Clayton has expanded and evolved over the past six years, along with the rest of the mortgage banking industry.

Q: As the new head of Clayton, what are your priorities and what keeps you awake at night?

D'Urso: Without question, our clients are always our number one priority. That is followed very closely by our employees. You cannot serve your clients well without having great people, so we spend a lot of time on people. What keeps me up at night? Probably the same things that keep our clients up: The size and health of the overall mortgage market; sources of liquidity; how hard it is to do business in the current regulatory/compliance environment; and finding new opportunities.

At Clayton, we focus on how to take risk, cost and friction out of our clients' businesses. We're working closely with our new parent company, Radian, to develop new solutions for their traditional client base as well as ours. We are also very excited by the opportunities to offer our clients enhanced service and tools.

Q: Before the mortgage crisis, Clayton's primary business was conducting due diligence for private-label securitizations. Today, that market is only a small fraction of what it once was. How has this changed Clayton's business model?

D'Urso: In a word: dramatically. Five or six years ago, Clayton was a due diligence company with a few ancillary businesses. Now, we are a balanced company with a variety of strong offerings, including due diligence.

For example, we'd always had a consulting practice, but over the last four or five years, that business has grown significantly by helping servicers understand and adapt to new regulations and consent agreements. We have also expanded our role in helping investors and larger lenders find and evaluate the operational capabilities and risks in new lending platforms.

In recent years, we also have substantially enhanced our surveillance and oversight business. Pre-crisis, the market's expectation for a surveillance function was really more of an information and reporting role. Now, many of our clients ask us to provide in-depth oversight and asset management services focused on servicer operations, collateral and borrower credit.

Given the servicing expertise that we have resident at Clayton and our deep domain knowledge in the area, this is right in our strike zone. As such, we have combined our expertise and knowledge with new technology that allows us to process almost real time information, including daily data feeds from servicers. With this capability, using all of our tests and filters, we are able to really understand, on a daily basis, what is happening with servicers' processes and client assets.

Clayton's business model relies on loan trading activity across the mortgage spectrum, including whole-loan trades, quality control, mortgage servicing rights (MSRs), and non-private-label and private-label securitization. Although securitization volumes are down, our underwriters continue to be busy with the wide variety of our clients' ongoing due diligence assignments, as well as new engagement scenarios. Examples include working with the government-sponsored enterprises on their risk-share transactions, numerous MSR transactions over the past several years and adapting our diligence platform to accommodate the significant increase in regulatory consent order work requiring our expertise.

Relying on the strengths that made us a leader in the residential mortgage-backed securities (RMBS) space – our underwriting and surveillance expertise – we are leveraging these skills to help clients in acquiring whole loans and portfolios, undertaking servicing transactions and selecting and monitoring subservicers.

The new compliance-focused environment has created a high demand for both the origination and servicing professionals in our staffing business.

Nearly three years ago, we acquired Green River Capital, which has firmly established our leadership presence in REO asset management and the single-family rental (SFR) market.

Clayton remains the market-share leader in private-label securitization. We continue to participate in securitization reviews and invest in our system and processes to accommodate the ever-changing private-label securitization requirements, and we remain ready for the return of increased origination volumes and bank portfolio sales.

Q: Now that qualified mortgage (QM) and qualified residential mortgage (QRM) rules have finally been defined, will this expand private-label RMBS issuance? If not, what will it take to restart this market and bring private capital back?

D'Urso: Although the alignment of QM and QRM is a positive factor for the return of the private RMBS market, this alone will not expand the private-label RMBS market, as there are additional variables at play that the market still must address. Sure, it helps to have clarity on a pending regulation and there will be one less underwriting standard for the industry to address, but the private-label securities (PLS) market still faces a lack of investor confidence in deal-enforcement mechanisms. Investors want to be sure that, if a default occurs, the appropriate parties will bear the costs and the trusts will absorb only those costs priced for and paid for by investors. The PLS market resurgence awaits term sheets that provide AAA investors with confidence that their rights and assets are going to be protected.

The ‘ability-to-repay’ (ATR) rules under the Truth in Lending Act, which help define a QM, have been in effect for less than a year. Aggregators have been developing more non-QM programs, and by extension, lenders have been originating and delivering under these programs. Nonetheless, we have not seen significant securitizations of these non-QM loans. With QRM risk retention requirements applicable to securitizations of non-QM loans scheduled to go into effect next year, we may see aggregators either pull back from non-QM products or adjust their pricing to account for the additional risk retention requirements. However, somewhat counter-intuitively, the market may benefit from these clarifying requirements, which remove the uncertainty of what constitutes a QRM subject to risk retention.

I believe, as many others have been advocating, that an independent ‘investor representative,’ bearing the fiduciary responsibility to oversee and execute on enforcement actions, will provide the necessary foundation for investor confidence. As conceived, investor representatives will have the power to act on behalf of the trust. They will protect the trust by conducting servicing oversight, performing cashflow reconciliations and identifying loans for further review. If structured properly, this will contribute substantially to necessary economic alignment across the entire investor class.Â

Q: So far, most of the new private-label deals haven't included surveillance. Why is this, and will this change going forward?

D'Urso: Most securitizations to date have been jumbo, super prime with very few, if any, delinquencies. Surveillance has historically been considered a default management service, so it's hard for the industry to get its arms around the value proposition of surveillance when the prevailing opinion is that few loans will ever go delinquent.

The reality, however, is that surveillance offers those bringing a securitization to market the ability to provide transparency (through information availability and content standardization) and issue identification and resolution. Clarity in ‘following the cash’- from borrower payment, to servicer advances, to cashflow waterfall distribution – is where we continually identify and resolve issues, regardless of collateral makeup and performance. This is especially important, given the current and growing regulatory environment, because today's surveillance extends to compliance in all facets of the servicing process, from payment application to notices, and, if necessary, default management. This rounded, proactive approach provides valuable insight ahead of potential problems, enabling early intervention on behalf of the investment community.

We believe the existing, robust demand and need for our services will only grow as participants return to the market and the credit box expands. The events that preceded the mortgage meltdown make a third-party oversight provider, with the appropriate authority, a necessity for future securitizations.

Q: Consulting, particularly in the servicer space, and REO asset management (through Green River Capital) have been strong businesses for Clayton over the past few years. Will this change as servicers get more accustomed to the new rules and REO becomes less of a pressing problem?

D'Urso: Our consulting business has been strong over the past few years and remains robust. Much of what we have been doing is helping servicers to understand new regulations and expectations and to re-engineer their systems and workflows to comply.

Although servicers are becoming accustomed to the new rules, we don't expect the risk environment to soften, and we anticipate the heightened scrutiny by regulators will continue. Business opportunities for our consulting business will continue to expand as Clayton continues to assist servicers with proactive self-assessments, enhancement of enterprise risk programs, and further development and implementation of vendor management programs.

The total volume of REO and delinquencies is dropping, but the requirements placed on REO asset management companies are increasing. Some companies are electing to exit the business because of the difficulty and expense of conforming to Consumer Financial Protection Bureau and client requirements. Other participants lack sufficient demand for their services, resulting in further attrition. Fortunately, Green River's industry position remains strong, and we expect it will continue to grow as it continues to create new offerings that complement its existing REO.

By way of example, Green River has leveraged its valuation and property preservation skill sets to become the go-to provider for property-level due diligence in the SFR bond market. Over the past two years, Green River has evaluated more than 172,000 properties for institutional buyers and issuers. It was involved in all of the single-borrower, SFR deals that have come to market to date.

Q: What new areas is Clayton focusing on?

D'Urso: Multi-borrower SFR securities, diligence to determine ATR status of non-QM loans and securities, subservicer evaluations and CFPB readiness assessments are all new areas.

Recently, we began exporting our REO asset management expertise to European banks. This is a promising cross-business-unit opportunity for Clayton Euro Risk and Green River.

Q: Recently, Radian acquired Clayton. What synergies did they see? How are you working together to create new opportunities?

D'Urso: Well, for starters, Radian gains a diversified revenue stream and Clayton joins a market leader in the mortgage space. We are excited to be able to roll out Clayton's offerings across Radian's impressive client base and to allow Radian to bring many activities in-house that to date have been outsourced. We also believe that our suite of services differentiates Radian from other sellers of mortgage insurance and that we will be able to roll out new products to the marketplace going forward. Further, given that Radian takes real mortgage risk everyday as part of its core business, Clayton can more readily and economically align interests with our clients and investors in areas like PLS markets.

This, of course, is above and beyond the potential integration synergies in our technology, HR and other functions. All in all, we're extremely excited for the future and expect the deal to be very positive for everyone involved.

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