Deal Agent: A Structural Enhancement to Private Label RMBS

September 14, 2016
The U.S. Treasury Department (the “Treasury”) views a healthy private label residential mortgage-backed securities (“PLS”) market as “an important component of a reformed, safe, and sustainable housing finance system that will complement the enactment of comprehensive housing finance reform legislation.” Fifteen years ago, the PLS market saw approximately US$240.6 billion in new issuance; by 2006, the market reached a peak of approximately US$1.01 trillion in new issuance. However, in the eight years since the height of the financial crisis the PLS market has experienced modest activity, with just US$13.7 billion of new issuance activity in 2015, while securitization products like commercial mortgage-backed securities, auto loan securitizations and other esoteric asset classes have enjoyed more robust recoveries. In the interest of spurring further growth in the PLS market, the Treasury formed the “PLS Initiative,” a forum comprised of institutional investors, issuers, servicers, ratings agencies, due diligence firms and other key stakeholders, to discuss current issues in the PLS market and ideas for responsible growth.

For over eighteen months, the PLS Initiative worked on developing proposals to achieve its goals. One proposal receiving renewed attention is the addition of a “Deal Agent” to new issue PLS. The Deal Agent is an independent deal party with fiduciary duties to the securitization trust and certain oversight responsibilities. Some investors believe that the presence of a Deal Agent would address certain structural problems in legacy PLS deals and could help jump start the PLS market. Moody’s Investor Services recently weighed in, writing that “[t]he inclusion of an independent and competent deal agent in future residential mortgage-backed securities (RMBS) transactions would strengthen transaction governance, increase transparency and reduce the likelihood of certain tail risks.” Moody’s notes that a Deal Agent is likely to have a more significant positive impact on PLS deals backed by weaker collateral due to the increased importance of servicing oversight and loss mitigation on these transactions. This article discusses the proposed Deal Agent framework.

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