Interviews October 9, 2015

Securitization -- Why Won’t My Loan Sell

You are a fan of a loan traveling with a data record—how does that operational efficiency streamline loan sales?

It’s not just the fact of a legal issue that’s important, it’s also the mitigants that support the lender’s decision. Since legal review information is expensive to extract, and it becomes more expensive with the passage of time, it’s critical to capture that color at loan origination. There’s also a “right-sizing” element to this process: the goal is to capture all legal information that is foreseeably relevant to securitization demands and to package it in such a way that counsel and other actors are informed about program preferences. The legal data record is our way of achieving this. Getting consistent decision-making and process throughout a loan program manages risk. 

How are problems with both big & small loans resurfacing and causing problems at the securitization level?

Big picture: Large loans are often closed later in the pool aggregation process, when the available time to cure problems may be short. Document defects or other legal review-prompted issues may be solvable, but a loan seller can run out of time — especially where third-party consent is required and the parties don’t control timing. Deferring a loan to a later pool can introduce new uncertainties. When we add rep exceptions and disclosure for loan issues (whether large loans or small ones), it shines a spotlight on those loans and can prompt follow up or other questions about the loan or the lender’s practices that can impact execution.

Bank v. non-bank lenders—do they have the same level of awareness & responsibility?

Banks are regulated in some ways that non-banks are not, and are subjected to reserve requirements intended to limit systemic risk. Banks will have a lower cost of funds than non-banks, but also be subject to compliance regimes and related costs that non-banks do not have. Non-banks are in the business of borrowing short and lending long, so their necessary access to credit imposes a market-based discipline. On the margin, you’d expect non-banks to have more of an appetite for loans with greater risks that support higher yields, and the more elastic underwriting standards that go with that business model. So each must be aware and responsible, but in distinctive and overlapping ways.

What opportunities are there for lenders at the securitization level?

CMBS involves the pooling and diffusion of individual mortgage risk among bond classes that are tailored for that purpose. CMBS has proven especially efficient at serving markets that were previously underserved (think non-trophy assets in non-gateway cities). The industry has proven itself to be flexible and durable enough to withstand our worst recession in living memory. There is always a business imperative to identify and price risk as efficiently as possible. Loan programs that do that well will have a competitive advantage and have a greater measure of protection from the contingent liability (both contractual and statutory) that permeates this space.

Meet the Author
Media Contact
Alex Wolfe
Communications Director

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