MARKET UPDATE (source: Rob Chrisman)
Recently Federal Reserve Governor Raskin gave a speech on the challenges in the foreclosure process, specifically related to PSAs and reps and warranties, providing a summary on how the Fed views the foreclosure issues. (About two-thirds of the loans made since 2005 have been securitized. As most know, securitization is a process that involves gathering hundreds of loans into one package and selling that package in the secondary market. Often the purchaser is a trust, and trusts are comprised of investors. After the loans are pooled and sold, the trust hires a service provider to collect monthly payments and distribute that money to the investors. That securitization agreement is called a pooling and servicer agreement or PSA.
Ms. Raskin noted that the PSA aligns the incentives of borrowers, servicers, and investors reasonably well when mortgage defaults are low, but does not in stressed environments. So Raskin suggested the following: It is imperative to reconsider the compensation structure so that servicers have adequate incentives to perform payment processing efficiently on performing mortgages, and to perform effective loss mitigation on delinquent loans. After the compensation structure is reconsidered, the PSAs need to be amended or renegotiated in order to facilitate more workouts. Finally, PSAs should clarify the situations in which loan modifications and other mitigation strategies should be pursued. One tool that could aid in providing such clarity, and has received substantial attention over the last few years, is the net present value model. Requiring servicers to take mitigative actions that are net-present-value positive to the investor could encourage the fair and consistent treatment of borrowers.