Latest RMBS Fix: Better Bondholder Communication


One of latest proposals for reviving the private-label residential mortgage market involves improving communications between issuers and investors.

The Structured Finance Industry Group released its fifth in a series of papers outlining contract language for new securities and other measures intended to reduce conflicts of interest between issuers, servicers and investors. It includes a proposal for a common communication platform for mortgage bond issuers and investors.

The proposal is in the formative stage and is subject to review and revision. The overarching principles include that it be administered by a third party; that it provide free access to all investors; and that it support notifications sent by transaction parties, communication among authenticated bondholders and voting process for consent solicitations.

The proposal also lays out recommended system criteria and specifications covering technology, access, authentication, communication, record keeping and security.

“Each transaction should provide investors free access to the designated communication platform,” SFIG states in its latest “Green Paper.”

Investor members of the working group believe that the cost of access should be paid by transaction cash flows. Charging individual investors would limit participation, especially by smaller investors. This is up for discussion.

Moody’s Investors Service believes that improving communication between all transaction parties would improve transparency and ongoing governance and monitoring of the transactions. In a report published Thursday, it noted that some common reasons investors and issuers need to communicate include requests for proxy votes, soliciting consent for amendments or resolutions, and notifications to and from various transaction parties and investors.

“Currently, because multiple intermediaries must forward communications to the ultimate investor, certain investors may receive the information more quickly than others and in some case some investors may not see the information at all,” the Moody’s report states.

Because the vast majority of bonds are held electronically, instead of in paper form, the current communication process relies on the Depository Trust Co. to forward communications to bondholders. However, DTC typically does not have a record of the actual investor’s identity; it only has the investor’s custodian/broker dealer. So it’s not clear who will ultimately get communication.

Ensuring that all investors receive communications isn’t the only benefit, however. Moody’s believes that encouraging investors of any size to raise concerns or other issues with the issuer and greater investor group should improve asset quality. “Under the current system, typically the costs and effort associated with raising and resolving issues may deter smaller investors to bring up issues,” the report states.

The latest Green Paper also includes a new form for comparing representations and warranties across deals by the same issuer or multiple issuers. Moody’s sees this as “credit positive,” if widely adopted, because it will make it easier for investors to assess the relative credit risk as a result of differences, if any.

“Currently, investors may have difficulty assessing RWs from deal to deal, even from the same securitization shelf,” the ratings agency said in a separate report published Thursday. “Offering documents do not highlight differences between two series or say whether RWs are the same.”

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