Creators and underwriters of asset-backed securities have joined bond investors in telling the Securities and Exchange Commission to alter its proposed rules covering sellers' obligations to buy back bad mortgages from future securitizations.

"Our membership felt the SEC proposal didn't address the real problem," Chris Killian, a vice president in the Securities Industry and Financial Markets Association's securitization group, said Thursday. "There is a realization on both sides of the disputes in existing RMBS transactions that the current mechanisms, and therefore outcomes, have not been optimal."

Bond sponsors and dealer members of Wall Street's largest lobbying group propose that sellers of residential mortgage-backed securities through shelf registrations be required to appoint independent firms to seek repurchases of loans whose quality was misrepresented. Sifma expressed the views in a letter to the agency responding to a series of possible new securitization rules.

The SEC wants to restore "investor confidence," according to an April proposal, that so-called representations and warranties will be enforced in the $1.5 trillion market for home-loan bonds that lack government backing.

Debt owners and guarantors in other parts of the mortgage market may be finding it easier to reduce losses by forcing repurchases and rescinding insurance, leading bondholders to begin to seek greater action. A group with more than $500 billion, coordinating itself through a Dallas lawyer, sent letters to bond trustees seeking their help. The Federal Reserve Bank of New York also said on Aug. 4 that it is trying to exercise "our rights as investors" after taking on debt through its bailouts.

Bondholders are concerned that the conflicts of interest of mortgage servicers, which must help identify claims on the holders' behalf and are often owned by lenders, "can cloud the prospect that the interests of investors will be aggressively represented as required," the Association of Mortgage Investors said in a July 31 comment letter.

Under the SEC's proposal, when lenders or securities issuers refuse to repurchase loans that bond trustees say may violate their contracts, they would have to get an independent firm to review the decision and investors must be informed.

Both AMI, an investor-only group formed this year to represent bondholders with about $300 billion of asset-backed debt, and Sifma, whose members also include money managers, say the SEC should put aside that plan.

Instead, it should require deals to include what both groups called a "credit risk manager" that would be able to investigate loan quality either at its own discretion or upon investors' request.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.