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Researching Subprime Loan Securtizations Kevin Byers Naca Subprime Article

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  • 8/8/2019 Researching Subprime Loan Securtizations Kevin Byers Naca Subprime Article

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    Researching Subprime ResidentialLoan Securitizations

    Researching Subprime ResidentialLoan SecuritlzatlonsKevin Byers. . . . . . . . . . . . CoverFrom the Editors. . . . . . . . . . . . . . . . . 2Should You Appeal, Again?Ronald L. Burdge . . . . . . . . . . . . 5Protecting Nondebtors from Fake orPre-recorded Telephone Calls Underthe FDCPA and the TePA

    Joseph A. Mullaney, //I andBrian T. Shaw . .............. 7

    New Benefits for NACA Members . . . . 8News from the States.............. 92007 - 2008 Bal/ot . . . . . . . . . . . . . .. 10NACA Continues to Grow.......... 11Home Pages. . . . . . . . . . . . . . . . . . . . 12Frontline News .................. 14Membership Application .......... 21NACA Meeting Notice. . . . . . . . . . .. 24

    by Kevin ByersAs issues around predatory lending have generated an increasingamount of interest in (the practices of subprime lenders, there is acorresponding interest in one of the most popular sources of liquidity, notonly for subprime lenders, but for any lender in the market, and that is thepractice of asset securitization. Very simply, this is the rather complexprocess of pooling similar assets and converting a stream of future paymentsto a present-day cash value, with a corresponding issuance of securities thatare sold to investors who provide this cash at the time of securitization.The key component to the success of a securitization is the legal

    separation of the loans in a pool from the entity that originated those loans.Without this, the originator":" who is often also the servicer - could go intobankruptcy and the loans would be part of the bankruptcy estate, thuscollapsing the entire structure of the securitization. Investors would not buysecurities collateralized by loans that are not separated from the originator,in terms of ownership, control, and management. Thus the loans areisolated in a trust under the tightly scripted management of a trustee, whoacts as a fiduciary for the investors in the trust.To achieve this separation, loans are always transferred into a trust viaa Special Purpose Entity (SPE) established for the sole purpose of"cleansing" the loan pools. After origination, loan pools may pass through anumber of separate entities, but a bankruptcy-remote SPE will always be the

    last entity in the chain of title prior to each loan in the pool being sold into atrust.Where to Learn the Basics

    A good place to start is the Securities Industry and Financial MarketsAssociation's website, which offers a detailed primer of securitizationContinued on Page 3

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    BYERS; ConUnued from Coyer

    transactions and the parties involved:http://www.jnyestinginbonds.comllearnmore.asp?catid=11&subcatid=57

    For a description of various securities filings and formtypes with brief explanatory text, the website of theSecurities and Exchange Commission (SEC) provides agood a list in the following .pdf document:http://WoNW.sec.gov/infoledgar/forms/edgform,pdfTransaction Documents

    The following two sections briefly review relevantsecuritization transaction documents and the SEC formson which they are typically filed. We will then walkthrough a recent securitization to see the process inaction,SEC Fil ings (Pre-2006 Deals)

    For asset-backed securities collateralized by homeequity loans, the most commonly used SEC filings fortracking public issuances are:Prospectus and Prospectus Supplement (Form42485) - typically filed in the name of the Depositor orSPE (see next section), which is often a subsidiary oraffiliate of the loan originator. These are the basicdocuments for investors to evaluate all aspects of asecuritization and the parties involved. They contain agreat deal of specific information about the loans in the

    pool, the chain of title of the loans, the underwritingcriteria of the lender/purchaser of the loans, theperformance of past loans, servicing information, andrepresentations and warranties, among other valuableinformation.Pooling and Servicing Agreement (filed on Form 8-K,generally a few days after the prospectus supplement) -this document outlines the legal responsibilities of thetrustee, the servicer, the Depositor, and the bond insurerif one is utilized in the transaction, and is filed in the name

    of the trust or by the Depositor. Very few issuers includethe Mortgage Loan Schedule (GMAC-RFC is anexception) on pre-2006 deals, but from January 2006forward this detailed listing of loans is often available withthe PSA. The PSA will also contain loss mitigationguidelines for the servicer (Article III of a PSA is generallythe section dealing with loan serviCing, and loss mitigationguidance is typically provided in Section 3,01, theServicing Standard, or the section under Article III dealingwith collection of mortgage payments.)

    Annual Report (Form 10-K) - this will include amanagement letter from the servicer for the trustregarding compliance with minimum servicing standardsoutlined in the Uniform Single Attestation Program forMortgage Bankers (pre-2006 deals) as well as a CPA

    letter attesting to the accuracy of the managementassertion regarding servicing compliance,SEC Filings (Post-2006 Deals)

    For deals closed after January 1, 2006, RegulationAB applies and requires significantly more informationabout a securitization than prior to implementation,Following are only a few of the useful informational itemsdisclosed:

    Prior to publication of the Prospectus Supplement, aFree Writing Prospectus may be filed by an issuer withthe SEC to communicate with potential investors at anearlier date than was previously allowed, Frequently theMortgage Loan Schedule for a trust will be included in thisdocument, indexed on EDGAR as "FWP."The Prospectus Supplement will include a detailedflow chart of the transaction showing the parties to thedeal.The Prospectus Supplement will include additionaldescriptive information about all parties to the transaction,potentially including third-party originators andsubservicers. It will also include a required link to newdisclosures by the originator detailing the performance ofsimilar loans originated and securitized over the previousfive years.The Pooling and Servicing Agreement will includea checklist for the parties responsible for each of theminimum servicing criteria required under Section 1122 of

    Reg AB, as well as extensive loan-level analYSis on theelectronic copy of the Mortgage Loan Schedule,Monthly performance reports will now be filed onForm 10-0 instead of Form 8-K.The Annual Report (Form 10-K) will require themanagement compliance letter as well as CPA attestation

    of compliance and disclosure of material noncompliancewith minimum servicing standards,Parties to the Transaction

    Typical roles of the participants in a securitization areas follows, all of which are spelled out in each respectiveProspectus Supplement:

    Seller - Oftentimes the Seller is also the originator ofthe loans in a given portfolio, but over the past few yearsthere has been a rise in the number of mortgage capitaldivisions of banks and investment banks that buy loanportfolios from the originator and who are shown as Sellerin the respective prospectus filings, This is often the firstentity to sell a portfolio of loans to either the DepOSitor(see next) or the trust.Depositor - A bankruptcy-remote Special PurposeEntity (SPE) established for the sole purpose of buying

    Continued on Page 4

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    BYERS; COOllnued from Page 3

    portfolioS and selling them into trusts to establish the "truesalenof the loans. The Depositor sells the securitiesissued by the Trust to investment banks (theUnderwriters), and is the name under which you will mostoften find the deal documents indexed with the SEC (seeaccompanying chart for a listing of SPE's and theiraffiliations).

    Trust - The trust is another Special Purpose Entitywhose sole purpose is to hold the loan portfolio describedin the associated prospectus supplement. The Trust isalso considered the Issuer of the bonds or certificateseventually purchased by investors, but frequently thesponsor of the securitization will be referred to as theissuer.Trustee - As the fiduciary representing thebondholders, the trustee is the holder of the loans in theircapacity solely as trustee on behalf of the trust.Underwriter - Simultaneous with a trust's purchaseof a loan pool from the Depositor, the trust issues bondsor certificates to the Depositor representing ownershipinterests in the trust; the Depositor has an agreement tosell these securities to the Underwriters, who areinvestment banks that will then re-sell the securities toinvestors. The dollar allocation of each underwriter'sshare of securities is spelled out in the ProspectusSupplement.Master Servicer - used in deals where there aresubservicers, the Master Servicer's job is to oversee the

    sub-servicers and to account for remittance payments toeither the Trustee or directly to the investors. This is atypical arrangement where an originator utilizes a "shelfregistration" of an investment bank but retains theservicing rights after securitization.

    , ."

    Servlcer - Oftentimes the loan servicer is also theoriginator, but in recent years the use of sub-servicers orspecialty servicers has become commonplace. Popularspecialty servicers include Ocwen Loan Servicing, LittonLoan Servicing, Select Portfolio Servicing (fka FairbanksCapital Corporation), and America's Servicing Company(dba for Wells Fargo).

    Certificate or Bond Insurer - Many loan originatorsdo not have the credit rating or financial capacity thatwould automatically gamer a high credit rating, andtherefore their pools of loans need credit enhancement.This often comes in the form of a surety bond provided bybond insurers such as MBIA, Ambac Assurance, FinancialSecurity Assurance, or Financial Guaranty InsuranceCorporation, and lowers the cost of the securitization andthe return demanded by investors in the bonds orcertificates being offered.Rating Agencies - Before an asset-backed issuanceis priced, the structure of the deal and the participants arereviewed by credit rating agencies Standard and Poor's,Moody's, Fitch or Dominion Bond Rating Service toassess the relative level of risk posed for investors. Thisassessment is carried out according to each ratingagency's guidelines for the specific type of transactionunder consideration. As an example, see Standard andPoor's rating criteria for subprime mortgage transactionsavailable at their website (see "Resources").Practical ApplicationsHow do you put this knowledge into practice?

    Assume someone asks you to find out what entitiessponsored deals involving loans originated by NewCentury Mortgage Corporation in the past twelve months.Following would be a basic analYSis to answer thisquestion:Continued on Page 17

    ) . ~ .. , ... "" ; : ~ "Remember, nol one word about his foreclosure .

    Copyright Ie) The New Yorker Collection from Canoonbank.com. All Rights Resorved

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    BYERS; Continued from Page 4I. What entities securitized New Century loans inthe past 12 months?:

    Go to http://pro.edgar-online.com/expandedsearch.and do a keyword search on the phrase "NewCentury Mortgage" in the 'Full Text Search' section, thenunder the 'Form Type' section specify Form 424B5. Youcan tailor the date range of your search for morespecificity.

    From April 2007 through mid-July 2007, the resultsindicate at least ten separate entities securitizing loansoriginated by New Century. Use this information to obtainthe full-text document for free on the SEC EDGARdatabase:http://www.sec.gov/edgarlsearchedgar/companysearch.html.

    At the EDGAR search site, enter the exact name as itappears in the "A" above in the 'Company Name' box.Look for the 424B5 filed on the date listed in step "A" intliis list of filings. Note that the Pooling and ServicingAgreement will typically be filed shortly after theProspectus Supplement for any given deal, and will befiled on Form 8-K.II. What is the profile of the loans included in thesecuritization and which entities are involved?

    A Prospectus Supplement and Prospectus are meantto give investors all the information they need to make aninformed decision about whether to buy the securities inquestion. Thus the index to the prospectus supplement isyour roadmap to every securitization transaction (theprospectus is a more generic form and the supplementapplies to specific pools).

    In every Prospectus Supplement there is a sectiondescribing in tabular form the loan pool b e i ~ g securitized,including a breakdown of loans by fixed vs. adjustable, by~ ~ g t e , by interest rate, by loan balance, first vs. secondlien, prepayment penalty periods (if any), and FICO scoredistribution, among others descriptive categories.Resources1) To obtain corporate filings with the Securities andExchange Commission (SEC):http://www.sec.gov/edgar/searchedgarlcompanysearch.htmlhttp://www.edgaronljne.comhttp://www.10kwjzard.com2) For specific information regarding asset-backedsecurities, or general topics involving securitization, seethe following sites:http://www.absnet.net - great site for staying abreast ofasset-backed securitization information. Must registerand the premium service is fee-based, but the freeiriiormation gives a good map of what's happening in all

    sectors of the ABS industry.http://www.securitization.net - general informational sitewith a great deal of free and easily accessible information.http://www.vjnodkothari.com/index.htm - another generalinformational site by an industry expert.http://www.sifma.org - home page of The SecuritiesIndustry and Financial Markets Association (the entityresulting from the merger of The Bond Market Associationand The Securities Industry Association). See their sitehttp://www.investinginbonds.com for educationalinformation on all aspects of bonds.http://www.standardandpoors.com - for asset-backedsecuritization information, go to the "Structured Finance"sections. Included are reviews of servicers as well asquarterly updates on new securitizations that givesummaries of average FICO scores, LTVs, and type ofloan, i.e. fixed vs. adjustable. S&P also publishes theircriteria when reviewing subprime securitizations on thissite.http://www.moodys.com - gives some basic informationfor free, but must subscribe for more extensive data andreports.http://www.fitchratjngs.com - like Moody's, must be asubscriber for anything beyond basic information, thoughrecent problems in the subprime industry have led to agreat deal of useful analysis and articles by clicking ontheir link to subprime mortgage-related information.http://www.dbrs.com - the last of the four ratingagencies, with good content available at no charge.

    To research debtor/creditor relationships, UniformCommercial Code (UCC) filings with each state'srespective Secretary of State provide a glimpse into whois financing whom. The best (free) place to do this is eachstate's respective Secretary of State website; a listing ofall Secretaries of State can be found at the website of theNational Association of Secretaries of State:http://www.nass.org and click on either "CorporateRegistration" or "UCC Filings" in the left column.This can be especially useful because eachsuccessive purchaser of a loan pool in a securitizationtransaction files a UCC-1 (financing statement) showingthe seller of the loans as a debtor and the purchaser as asecured party.UCC filings are also helpful when assessing whatsources of capital lenders are utilizing for their loanoriginations. While a UCC-1 and its attachments do notusually include loan documents or loan information, theycan tell you what financial relationships exist and areparticularly useful for researching private companies thatdo not file with the SEC.

    Continued on Page 18

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    BVERS' Continued from page 17The following table, "Securitization Sponsors and Affiliated SPEs," contains a listing of originators/buyers of loans and

    their securitization Depositors.RESIDENTIAL SUB PRIME and ALTA SECURITIZA TlON SPONSORS and

    AFFILIATED SPECIAL PURPOSE ENTITIES

    SECURITIZATION SPONSORS(Lender/Investment Bank)

    AFFILIATED SPECiAl PURPOSE ENTITY

    Accredited Home Lenders,TOc. ....- . - - .. -. . ... Accredited Mort9ageToan'-RErrTiUSC .. .-.. - . -.... --.-----------..--.. " ' ' ' ' ' ' ' - - - ' - - - ' ' - ' - 'f- - .."....... ....-" " " " " . - . - - -.. - - . - " ' . ' . , , . - - - -~ - - - ' - ..- "..- . ." - . , , -, ..,. 1-;--" . - - ; ~ 7 " ' - - = - - ~ ~ ' - - ' -~ ! ! ! ~ ! ! ~ . r : ! ~ M ~ , Corp_ ... .._, ._,__,,,.,'_, f . ! ~ ~ r i . ? n Home M o r t g a 9 ~ ~ ~ . ! : ! : ~ . _ " . ___,, __ ., _~ ~ ~ ~ . ! 9 . ~ _ s . ~ . M ( ) ~ _ a g e Ino-.==----"-- - .. '"P.meriquest Mortgage Securities:"j(jc.--'- ."....----- ..---... ~ = - ~ ~ ~ . : . ~ = : - : : ~ : . ~ ~ , ~ ~ ~ ~ ! : ; ~ ~ ; r t . t ; ; _ ~ ; J ! l ~ ~ ~ ~ ~ ~ .. ' - ~ = ~ ~ ~ = ~ ~ .._ = ~ ~ ea:.nk ~ f i e r i ~ ~ ~ ~ _ ~ ~ ~ : , , ~ ___~ = ~ , ' . : ~ ~ - . ' : ' = : ~ _ = : Asset-Backed F u n d i n J J ~ ! P ~ - ~ " ' . , : , , ' : ".- - - - ..- .."..-,-....- '---.. ..,,--..----'--,....,----+S:;:'e-cu-"'7.riti'z-ed Asset Backed Receivables:U:C"---'! ! ~ r c l ~ ~ _ B a n ~ f ! ~ _ , __ ._____._ .__.__ ._,,_. . . . ._ ( S A ~ R ) _______ ,._"_____ ,__..'...' ....' ..BayviewFi'iliii1ciaIW'-----"- -. - --"--'-liayVIew Financial Securities Company,He ,..,.._----- .._,-----_." ._.._-- --- .._,,-..._-_ .._--_ .._--- --.---"-.,,.--,--.... - .. " ..-.---.,,-,-.-- ...... "" .." " , - - - -1 - - - - ....- - ..- -....- . - ------- ,..--.-- ...- . - - - , ..~ ~ ~ ! ~ . ~ ~ m s _______ . ""_,,,._,,__ ,,.,_. __ B e a ~ Stearns Asset Backed.f()!p.:_____.____ .. __ _.__ . ___._ ..__, __ ..,___ ._______ .___ , ,_ ',., !=lear Stearns Asset Backed Securities, Inc._,carrtriQton S e c u r j t i e s ~ I ' P ' " ", - .. ",,_.-._....-.--. -,.," .... .. ' ... --.,--.-.--.. .--,--, .... ' ... ,--".-.--"--"( C a ' ! ! ! ' ! 9 . t ~ I } S ~ p i t ~ I . _ ~ ~ . n a ! l e m e n L _ . _ _ _ __ ~ ) ~ I ! w i c h Asset Acceptance CompanX!..LLC _________

    c T t i c o r p t r u S f B a F i k ~ = ~ ' : : ~ ' ~ : ~ : = = ' = = ~ .. ~ : : ~ ' . 9 i t i . ~ ~ ~ p R e s i d e n t i ~ J ..~ E . ~ a g e S e c ~ r f t i e s ; T n . ~ - - .. - - CitiMortgage, Inc . - - ..- -....--.-,-... - --"-'. -.., C f f i C O r P M c i i t 9 i g e S e C u n f u ; s ~ I n C - - " - - " - ' " .... -," ....______ ~ = ~ = = ~ , " ..~ . ~ ~ ~ = _ : = = _ _ , g ~ 9 r . . O ~ p _ ~ ? " r : t J L a , ~ _ l : . ~ .. ! ~ _ : : = = : , ~ : = ~ ..= - - = ~ ~ ~ ~ : 6 ! ~ ! ~ ..~ . H o m e l o a n s Inc_______ ..___ - ---- C W A B S . i i l C ~ = ~ : ~ : .. ____.____ .__.__ .,1 -__ ", _____. . . .__ .._._,____...__ ...... ' ' ' - ' ' ' ,,'___,_,__ _ C W ~ ~ T ! . . I ~ ...._______ .._..._.... ". __ .......____.......__ ...~ ~ ~ i ! ~ ~ s e / D L J M o r t . g a g ~ , ~ ~ p 1 ~ j ; J : n . ~ . ~ _ , - ' ~ ..... ~ ~ ~ ~ t ~ B a c k e d Securities C0'E.... , _ . _ ' - : - ' ~ ~ : _ . ' ....1--'--- , - .. - - "

    ~ ~ i d m a n s a C h S 8. __ , ..b: - ' - - . , . - - - - - - - - - - - - - - -.. -.--.

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    BYERS; Continued frpm Page 18

    RESIDENTIAL SUBPRIME and ALT-A SECURITIZA TION SPONSORS andAFFILIA TED SPECIAL PURPOSE ENTITIES

    Bio

    SECURITIZATION SPONSORS(Lenderllnvestment Bank)

    l _ n ~ ~ _ E 3 a n k

    ~ f i ~ o r g a n < : : h a s e 7 ~ a _ ~ ~ _ 9 _ n ~ Financial. Li.C:

    L ~ n g ~ e a c h - M o r t 9 _ a : 9 ~ - C o : : ~ ~ ~ ~ I I Lyn.EE_ _M ( ) ! ' Q ~ f l ~ ~ ; t a n l _ ~

    Opteum Finandai Services. Lee -( f I < ~ ! : l g _ ~ _ r _ ~ ! ! l _ ~ n c i a l ServiceS. LL

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