The agency proposed sweeping changes to both the due diligence and surveillance processes, in particular, as well as suggesting it would undertake a significantly more comprehensive assessment of originators.
Perhaps most surprisingly, Moody’s said it wants to see completely independent third parties engaged during both issuance and underwriting, and during a “standard post-securitization forensic review” that would look at loans that become severely delinquent during the first 18 months of a deal’s life. The pre-issuance due diligence standard suggested by the agency would set a minimum sampling size of 5 to ten percent for prime and subprime loans.
Moody’s proposal to engage third parties at key stages of the securitization process represents a stark departure from current industry practice, and hits into the area most frequently targeted by critics as representing a conflict of interest for rating agencies, who are paid by issuers to structure deals on behalf of investors.
The agency also proposed sweeping changes to representations and warranties, suggesting that issuers “more explicitly address fraud, misrepresentation, data quality, early payment defaults and adherence to underwriting guidelines.” Moody’s said it may even decline to rate altogether transactions lacking the additional disclosures, as well as any transaction backed by an issuer lacking the financial resources to absorb repurchases.
Beyond the loans themselves, Moody’s also said it will conduct a more comprehensive review of each originator and will report on its opinion of its strengths and weaknesses, as well as maintaining records of each originator’s track record in previous securitizations. The rating agency did not say it would go so far as to actually rate originators, however — something many industry participants have suggested is a needed reform.
Moody’s also said it would likely become the latest party to start asking for additional data from issuers and servicers. The agency wants significantly expanded data to enhance its surveillance efforts, it said — and that includes monthly performance data that ties loan-level data from servicers together with the data collected during deal issuance. We’re talking about detailed data on loan modifications, fees, claims — everything.
Moody’s said it will look to apply the new standards to prime as well as non-prime securitizations. Industry participants have through April 11 to comment on the proposed rules.