Mortgage servicers and bond trustees fail to get bad loans repurchased by lenders as often as they should, harming investors, Amherst Securities Group LP said.
Servicers have no financial incentives to incur the costs to "put back" loans, and there's also "often a direct conflict of interest if the servicer and the originator are related parties," Amherst analysts led by Laurie Goodman wrote in an April 13 report.
Of 42,263 privately securitized loans that never made a single payment to investors, which typically would constitute grounds for putting back the debt, only 37% have been repurchased, the analysts wrote.
The report came after the Securities and Exchange Commission said on April 7 that it would attempt to address investors' concerns about the issue in a proposed overhaul of rules governing securities backed by loans and leases.
Under the new regulations, when lenders or bond issuers refuse to repurchase loans that trustees identify as violating warranties, they would need to have an independent firm review the decision, according to the SEC's proposal.
Mortgage-bond trustees oversee loan servicers and pass on to investors cash flows and reports of performance of the debt. Servicers bill borrowers, collect their payments, and foreclose on or rework delinquent loans.
In practice, "trustees tend to take a largely passive role, as they have no incentive to do otherwise," the Amherst analysts said. "Trustees would argue that they do not have the information to completely monitor for rep and warrant violations, and frankly, that they are not paid enough to do this," they said.
One solution would be "the introduction of a party that is charged with protecting investor rights, and paid on an incentive basis," they said.