Structured Finance. U.S. RMBS Third-Party Review Update. Overview of Third-Party Review Activity Special Report. Residential Mortgage / U.S.A.

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1 U.S. RMBS Third-Party Review Update Overview of Third-Party Review Activity Special Report Residential Mortgage / U.S.A. This report provides a summary of third-party review firm (TPR) activity in the U.S. RMBS sector, including a description of 11 TPR firms that Fitch has reviewed. This represents Fitch s first special report on TPR s activity, which we expect to update at least annually. Key Component of U.S. RMBS: The due diligence provided by TPR firms helps ensure the information provided by the issuer is reliable. Fitch currently is unable to rate U.S. RMBS without a satisfactory due diligence sample reviewed by a Fitch acceptable TPR. Diligence Percentages Have Been High: Private-label RMBS transactions issued in recent years have typically included more due diligence than the minimum samples needed to obtain a rating. Most prime jumbo, non-prime and re-performing loan (RPL) transactions have provided due diligence reviews on close to 100% of the mortgage pool. Results Reflect Strong Controls: The results of the due diligence on recently originated loans generally reflect solid operational controls and post-crisis industry improvements in policies and procedures. For newly originated loans, over 99% of diligence grades have been A or B grades, reflecting no more than non-material exceptions. As would be expected, diligence grades on loans in re-performing loan transactions that were originated prior to the financial crisis show a higher percentage of C and D grade loans, reflecting more material issues. TPR Concentration: 83% of all due diligence results reviewed by Fitch since 2014 have been provided by two firms, although the number of active TPR firms varies by RMBS sector. Analysts Amit Arora amit.arora@fitchratings.com Roelof Slump roelof.slump@fitchratings.com

2 TPR Process Overview TPR firms review a sample of loan files backing U.S.RMBS transactions and provide the following: 1) a comparison of reported loan-level data against information in the loan file; 2) a comparison of the sample loans underwriting against the stated underwriting guidelines; 3) an opinion of whether the provided value of the underlying property is supportable; 4) an opinion of whether the loans were originated in accordance with laws and regulations. Two components of the TPR review that have been a focus recently have been compliance with the Ability-to-Repay (ATR) Rule and compliance with TILA-RESPA Integrated Disclosure (TRID). When reviewing loans for ATR, TPR firms confirm the originator s designation of the loan as a Safe Harbor Qualified Mortgage, Higher Priced Qualified Mortgage, or Non-Qualified mortgage and, if applicable, determine whether the originator followed its underwriting guidelines to consider the required eight underwriting factors. However, importantly, TPR firms are unable to confirm whether the originator s underwriting guidelines comply with ATR as that decision will ultimately be made by a judge in the event ATR is contested by the borrower. In addition to ATR, TRID compliance has also been a focus area. On June 15th, the Structured Finance Industry Group (SFIG) published its RMBS 3.0 TRID Compliance Review Scope to establish best practices for TPR firms. The guidance reflected market consensus on a standardized approach to identifying material and immaterial exceptions to the new law. Fitch participated in the development of the guidance and adjusted its diligence grading to incorporate the standardized approach. Due Diligence Results Since 2014, Fitch has received due diligence results on over 100,000 loans from 92 securitized transactions. Sample size varies by sector according to criteria, but currently, in practice, the majority of the securitizations receive 100% diligence. For large transactions such as the Government-sponsored enterprise (GSE) credit risk transfers (CRT), a statistically random sample that provides a 95% confidence level with a 2% margin of error is used. Fitch s opinion of the origination-aggregator platform, as well as the platform s historical performance, plays a role in using a statistical sample. Due Diligence Grades by Sector Due Diligence Grade Distribution (Equals 100%) Sector Sample Size (Loan Count) Sample Size ( % of Pool) A B C D Prime Jumbo 18, RPL 53, GSE CRT 22,559 < Safe Harbor 6, Non-Prime 1, a 3.70 a Total New Origination Total Seasoned RPL Total All a C and D grades for Non-Prime reflect TRID issues that would have been graded B under updated criteria. Related Criteria U.S. RMBS Master Rating Criteria (December 2016) Loans graded A meet all applicable guidelines without an exception or waiver, the value is supported within 10% of the original appraisal amount and the loan meets all applicable laws and regulations. Common examples of B grades include loans that do not meet every applicable program guideline but meet the majority of required loan characteristics within the U.S. RMBS Third-Party Review Update 2

3 guidelines and have strong compensating factors to offset the exception. Other B grades include non-material exceptions that would not impact the enforceability of the loan or circumstances where the statute of limitations has expired for compliance findings. For recent RPL transactions, examples of C D grades include missing required disclosures such as the note, mortgage, truth in lending, and final HUD1s. Under the latest Fitch criteria, a majority of these loans previously graded as C would now be classified as D. The C D grades for the non-prime transactions are related to the initial TRID loan reviews where TRID was not yet incorporated into Fitch criteria and market participants did not have a clear approach to cure the TRID exceptions. Many of the loans would have received B grades based on the latest criteria published by Fitch on June 27, The criteria now states that if a loan is cured or re-disclosed in good faith within the allowable time frame, the loans will receive a final grade of B. TPR Firms Fitch conducts reviews of TPR due diligence firms that are actively involved in Fitch-rated RMBS every months. The TPR firm is expected to be an independent company with no ties to the loan originator/aggregator, the issuer of the notes or the security underwriter or any other party to the transaction. Fitch s review of TPR firms is focused on confirming that they have adequate processes and controls in place and are capable of conducting effective due diligence reviews. As part of its assessment, Fitch considers various factors, including the company s operating history, mortgage underwriting expertise, quality control (QC) processes and procedures, staffing and training, and the adequacy of technology and reporting. In addition, Fitch will assess the firm s procedures for ensuring independence of due diligence reviews from other potential conflicts. Fitch has provided 12 acceptable TPR designations. Several of the TPR firms have been involved in private-label securitization in recent years, while others are involved in QC, quality assurance (QA), and repurchase/litigation reviews as well as whole loan transaction reviews. The following TPRs have been designated as acceptable: Distribution of TPR Activity on Fitch-Rated U.S. RMBS Since (%) Fitch Latest Fitch Review Safe TPR Firm Review Date Status Reviewed RPL/NPL GSE CRT Jumbo Harbor AMC 2016-Aug. Acceptable Clayton 2016-Aug. Acceptable Opus 2016-Sept. Acceptable Adfitech 2016-Aug. Acceptable Digital Risk 2016-April Acceptable IngletBlair 2016-April Acceptable The Barrent Group 2015-Dec. Acceptable Covius 2016-Sept. Acceptable Mission Capital 2015-July Acceptable Infinity 2015-Dec. Acceptable EdgeMac 2016-April Acceptable Total % Total No. of Loans 101,955 53,734 22,559 19,131 6,531 U.S. RMBS Third-Party Review Update 3

4 TPRs Active in New RMBS Adfitech, Inc. Adfitech is headquartered in Edmond, OK and has been performing due diligence reviews since The company was owned by Thornburg Mortgage Inc. from 2006 to Since 2010, Adfitech has been an independent publicly owned company that is traded over-thecounter (ADFT). Adfitech provides due diligence, residential mortgage fulfillment services, and QC for mortgage market participants, including banks, mortgage insurance companies, GSEs, investors, credit unions and other financial institutions. Adfitech has performed due diligence reviews on several GSE credit risk transfer transactions. American Mortgage Consultants Inc. (AMC) AMC s corporate headquarters is in New York, NY and its primary production facility is in Tampa, FL. AMC has been one of the most active RMBS due diligence providers since AMC is owned by a private investor group, Five Mile Capital Partners II, LP, headquartered in Stamford, CT. In December 2015, AMC acquired JCIII & Associates, Inc. (JCIII), making AMC the largest provider of loan reviews for private label RPL securitizations. Fitch had earlier reviewed JCIII as an acceptable TPR firm. In addition to traditional RMBS jumbo loan activity, AMC has extensive experience in RPL/seasoned loan reviews. AMC s management team has extensive experience managing and running due diligence operations. AMC has a very robust due diligence technology platform. Clayton Holdings LLC (Clayton) Clayton is headquartered in Tampa, FL and has been performing due diligence reviews since Radian Group Inc. (NYSE: RDN) purchased Clayton from Greenfield Partners in July Clayton has purchased several real estate companies that provide diverse services and products to the RMBS industry, including Green River Capital, a broker price opinion (BPO) and REO asset management company acquired in 2012; Red Bell Real Estate, an automated valuation model (AVM) and BPO company acquired in 2015; and ValuAmerica, a national title and appraisal management company purchased in Clayton s due diligence activities have been focused on whole loan sales, forensic reviews and new loan securitization, covering jumbo, GSE, and RPL transactions. Clayton has extensive broader market experience that includes consulting, surveillance, and staffing solutions, In addition, Clayton was formally reviewed by Fitch as an acceptable deal agent. Digital Risk, LLC Headquartered in Maitland, FL, Digital Risk has performed due mortgage loan due diligence and QC, technology and compliance activities since The company was formed in July 2005 with an initial focus on QC reviews. In 2013, Digital Risk was acquired by Mphasis Ltd., a large Indian based IT services company that is majority owned by the Blackstone Group. In 2007, Digital Risk created its proprietary platform and began offering due diligence reviews. In addition to due diligence, Digital Risk performs fulfillment services, QC/QA reviews and appraisal reviews through its appraisal management company. Digital Risk has performed due diligence reviews on several GSE credit risk transfer transactions as well as provided end-to- U.S. RMBS Third-Party Review Update 4

5 end fulfillment services to banks through Secure and Fair Enforcement for Mortgage Licensing Act(SAFE Act) licensed branches in Florida and India. IngletBlair, LLC Inglet Blair is headquartered in Austin, TX and has been performing due diligence activities since The company was founded by Craig Inglet and Sandy Blair as a privately owned limited liability company (LLC). The company s senior management team averages over 20 years industry experience. Inglet Blair has performed whole-loan due diligence since 2003 and has been party to rated RMBS since Most recently, Inglet Blair has been active in RMBS prime transactions. It is also actively supporting residential mortgage conduits, and Non-performing loans (NPL)/RPL bulk trades, as well as pre- and post-closing QC for lenders and warehouse participants. Opus Capital Markets Consultants, LLC (Opus CMC) Opus CMC is headquartered in Lincolnshire, IL and has been performing due diligence reviews since Opus was acquired in January 2014 by Wipro Ltd., a large global information technology, consulting, and outsourcing company. Opus CMC s due diligence focus has been on QC reviews, whole loan sales, forensic reviews and new loan securitization. To date, Opus CMC has been involved in jumbo, GSE, and RPL transactions. Wipro s backing is expected to help Opus CMC to further grow its business and expand into new opportunities. Acceptable RMBS TPRs (not involved in Fitch-Rated Transactions) Below are TPR firms that perform due diligence services not directly involved in RMBS 2.0 securitizations; however, they are actively reviewing newly originated loans and have experience reviewing loans originated to ATR/QM and TRID regulations. Fitch has determined these TPR firms have adequate management, process and procedures, staff, technology and competence to perform due diligence in RMBS securitizations. The Barrent Group (TBG) TBG is headquartered in Urbandale, IA and has been performing forensic due diligence work since its formation in TBG is privately held by a family owned real estate investment company. TBG s senior management team previously held roles at Wells Fargo, where they were also focused on forensic loan reviews of loan files. TBG has focused extensively on forensic reviews for residential mortgage securitized loans and reviews of deal documentation as well as determining compliance with breaches of representations and warranties. The company also provides pre- and post-closing QC reviews, whole loan due diligence and mortgage consulting. Covius Real Estate Services, LLC (CRES) CRES is headquartered in Atlanta, GA. The CRES diligence division has been providing residential loan review and QC support for originators and aggregators since its initial formation in the mid-1980s. The CRES due diligence platform has operated under several entities, including Mortgage Ramp, Office Tiger, RR Donnelley and Covius, LLC. In March 2016, require Holdings LLC (require) acquired three divisions of Covius, LLC and the residential due diligence division began operating as CRES. require is a national real estate U.S. RMBS Third-Party Review Update 5

6 and mortgage services company. require is owned by L2 Capital Partners (L2), a middlemarket private equity firm. CRES has focused on residential mortgage forensic reviews since 2006 and, in 2015, began an effort to perform QC on new originations. Edge Mortgage Advisory Company, LLC (EdgeMac) EdgeMac is headquartered in Anaheim, CA and is a privately held LLC founded in 2007 by Robin A. Auerbach, a former chief operating officer of a large originating institution. EdgeMac was originally formed as an origination business; however due to low volume, forensic due diligence became a focus. The majority of EdgeMac s diligence work on RMBS securitized assets has been repurchase/forensic reviews, which requires extensive review of deal documentation. EdgeMac has also actively performed representation and warranty reviews on RMBS transactions. Furthermore, EdgeMac provides support for residential mortgage conduits in performing preand post-funding reviews. Infinity International Processing Services, Inc. (Infinity) Infinity is headquartered in Rockville, MD and has been performing due diligence activity since The company is solely held by Chandresh Mehta, who has over 20 years of mortgage experience and has used his IT background to develop proprietary work flow software for underwriting and appraisal management services. Infinity was founded in 1998 as a tax and titles services company and has offered mortgage staffing and consulting services and loan review services since Infinity also offers BPOs, desk review and field review services in 50 states. Infinity has been involved in litigation repurchase reviews and, since 2013, has worked on pre- and post-close QC reviews and the residential mortgage RPL/NPL reviews. Mission Global Capital Services (MGCS) MGCS is headquartered in Englewood, CO. The company was formed in October 2015 by uniting the mortgage services business of Mission Capital Advisors with the due diligence services of Global Financial Review Inc. Global Financial Review was incorporated in 1998 and specialized in default reviews and was experienced in whole loan transaction activity, credit, compliance, and valuation reviews. MGCS s services now include data integrity review, collateral document review and cure, curative title work, agency delivery and trade support, due diligence and securitization support, regulatory compliance, origination support re-underwriting, and forensic reviews. U.S. RMBS Third-Party Review Update 6

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