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Mortgage Bankers Association. Presentation to the Securities and Exchange Commission on the Proposed Asset-Backed Securities Rule September 23, 2004. AGENDA. INTRODUCTIONS MORTGAGE SECURITIZATION MODELS ABS RULE DEFINITIONS PROPOSED DISCLOSURES PROPOSED RESPONSIBLE PARTY ROLE

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mortgage bankers association

Mortgage Bankers Association

Presentation to the Securities and Exchange Commission on the Proposed Asset-Backed Securities Rule

September 23, 2004

agenda
AGENDA
  • INTRODUCTIONS
  • MORTGAGE SECURITIZATION MODELS
  • ABS RULE DEFINITIONS
  • PROPOSED DISCLOSURES
  • PROPOSED RESPONSIBLE PARTY ROLE
  • PROPOSED ATTESTATION ENGAGEMENT
  • GENERAL MBA COMMENTS
  • RECAP OF MBA RECOMMENDATIONS

2

i introductions
I. Introductions
  • Mortgage Bankers Association:
    • The national association representing the real estate finance industry, with membership of over 2,700 companies
    • For 2003, an estimated $98.7 billion of CMBS were issued and $586 billion of RMBS (exclusive of agency guaranteed securities) were issued; the top 100 CMBS issuers and the top 25 RMBS issuers are all MBA members
  • Participant Introductions
  • General MBA View:
    • Benefits of Cohesive Set of Rules
    • Disclosures Generally Already Made Today
    • Industry has a Vested Interest in Serving Investors’ Needs

3

ii mortgage securitization models
II. Mortgage Securitization Models
  • Residential Mortgage Securitization Models
    • Master Servicer Without Servicing Responsibilities
    • Master Servicing With Servicing Responsibilities
    • Non-Master Servicer
  • Commercial Mortgage Securitization Model
    • Master Servicer
    • Multiple Master Servicer

4

slide5
RMBS MODELMaster Servicer Without Primary Servicing ResponsibilityFlow of Information & Documentation

INVESTORS

PSA

Securities

PSA

ISSUER / DEPOSITOR

TRUST

TRUSTEE

PSA

PSA

MASTER

SERVICER

PSA

Servicing

Agreement

Servicing

Agreement

Subservicer

PRIMARY

SERVICER

PRIMARY

SERVICER

PRIMARY

SERVICER

Outsource

Vendor

Contract

Contract

Loan Docs

Loan Docs

Loan Docs

Borrowers

Borrowers

Borrowers

5

PSA = Pooling and Servicing Agreement

rmbs model master servicer with primary servicing responsibility flow of information documentation
RMBS MODELMaster Servicer With Primary Servicing ResponsibilityFlow of Information & Documentation

INVESTORS

PSA

Securities

PSA

ISSUER / DEPOSITOR

TRUST

TRUSTEE

PSA

PSA

MASTER

SERVICER

AND PRIMARY SERVICER

Servicing

Agreement

PSA

Outsource

Vendor

PRIMARY

SERVICER

PRIMARY

SERVICER

Subservicer

Contract

Contract

Loan Docs

Loan Docs

Loan Docs

Borrowers

Borrowers

Borrowers

6

PSA = Pooling and Servicing Agreement

rmbs model no master servicer flow of information documentation
RMBS MODELNo Master Servicer Flow of Information & Documentation

INVESTORS

PSA

PSA

Securities

ISSUER / DEPOSITOR

TRUST

TRUSTEE

PSA

BOND

ADMINISTRATOR

Servicing

Agreement

Servicing

Agreement

PSA

Outsource

Vendor

PRIMARY

SERVICER

PRIMARY

SERVICER

PRIMARY

SERVICER

Subservicer

Contract

Contract

Loan Docs

Loan Docs

Loan Docs

Borrowers

Borrowers

Borrowers

7

PSA = Pooling and Servicing Agreement

cmbs model master servicer flow of information documentation
CMBS MODEL – Master ServicerFLOW OF INFORMATION & DOCUMENTATION

INVESTORS

PSA

Securities

PSA

ISSUER / DEPOSITOR

TRUST

TRUSTEE

PSA

MASTER

SERVICER

AND PRIMARY SERVICER

SPECIAL

SERVICER

PSA

Outsource

Vendor

Sub-Servicing

Agreement

Sub-Servicing

Agreement

Contract

Contract

PRIMARY

SERVICER

PRIMARY

SERVICER

Outsource

Vendor

Contract

Outsource

Vendor

Loan Docs

Loan Docs

Loan Docs

Borrowers

Borrowers

Borrowers

8

PSA = Pooling and Servicing Agreement

cmbs model multiple master servicer flow of information documentation
CMBS MODEL – Multiple Master ServicerFLOW OF INFORMATION & DOCUMENTATION

INVESTORS

PSA

Securities

PSA

ISSUER / DEPOSITOR

TRUST

TRUSTEE

PSA

PSA

MASTER

SERVICER

MASTER

SERVICER

SPECIAL

SERVICER

PSA

Outsource

Vendor

Sub-Servicing

Agreement

Sub-Servicing

Agreement

Sub-Servicing

Agreement

Contract

Contract

PRIMARY

SERVICER

PRIMARY

SERVICER

PRIMARY

SERVICER

Outsource

Vendor

Contract

Outsource

Vendor

Loan Docs

Loan Docs

Loan Docs

Borrowers

Borrowers

Borrowers

9

PSA = Pooling and Servicing Agreement

iii abs rule definition actual roles of participants
III. ABS Rule Definition & Actual Roles of Participants
  • ABS Rule Definition
  • “Servicer means any person responsible for the management or collection of the pool assets or making allocations or distributions to holders of the asset backed securities. The term servicer does not include a trustee …”
  • B.Industry Definitions
    • Master servicer  - Contractual agent with oversight of primary servicers, reporting responsibilities to the trustee, and may provide liquidity to the trust through servicing advances.
    • Primary servicer - Collateral administrator that performs mortgage loan servicing functions. May also be a master servicer or an affiliate of a master servicer.
    • Special servicer - The servicer of defaulted mortgage loans.
    • Subservicer - In CMBS, synonymous with the role of a primary servicer; in RMBS, a servicer that is under contract with a primary servicer.
    • Outsource vendor - In RMBS, sometimes referred to as subservicer.  A third party hired by a servicer to perform select functions.
    • Bond administrator - In CMBS, synonymous with the trustee. In RMBS, can be a separate role from the trustee. Performs security payment calculations and distributes funds to investors.

10

iv disclosures
IV. Disclosures
  • MBA Concerns
    • Static Pool Data/Collateral Considerations
    • APR, Points and Fees: Irrelevant to Investor Cash Flow
    • Servicing Disclosure Issues
    • Timeline Issues
  • MBA Recommendations
    • Eliminate Static Pool Data Requirement
    • Eliminate Disclosure of APR, Points and Fees
    • Utilize PSA Summary of Servicing Practices
    • Provide Guidance on Disclosure and Transaction Timeline

11

timeline of cmbs transactions
Timeline of CMBS Transactions
  • Issuers offer a tentative pool of assets for the transaction & determine the depositor for the transaction
  • Depositor offers the pool of assets to the market, investors pledge to purchase the rated class of assets – the non-rated class investor chooses the special servicer
  • Each potential master servicer submits a bid letter, offering a price to service the loans, to the depositor
  • Depositor notifies one of the servicers that they have won the bid & will be named as the master servicer on the deal
  • The “red” prospectus (draft copy) is written & approved by all named parties, the depositor, issuers, master servicer, special servicer, trustee, & rating agencies (the primary servicers are typically not a signing party to the document)
  • Issuers finalizes the pool of assets; the “black” prospectus (final) is printed & disbursed to the investors.
  • The Pooling and Servicing Agreement (PSA) is drafted based on the special servicer provisions, trustee provisions, rating agency requirements, master servicer bid letter terms & the general industry standards for a transaction
  • PSA is finalized by agreement of the named parties in the document
  • Master servicer completes negotiations with each individual primary servicer & finalizes the Primary Servicing Agreements
  • Depositor offers the pool assets as securities to the market & files the official documents to complete the transaction with the Commission

12

timeline of rmbs transactions
Timeline of RMBS Transactions
  • The owner of the assets to be securitized (the “Seller”) identifies a tentative pool of assets
  • Seller determines the underwriter & the depositor for the transaction.
  • Each potential master servicer submits a bid letter to the Seller
  • Seller notifies the master servicer that they have won the bid & will be named as the master servicer
  • Seller determines which party or parties will act as servicer of the assets. The assets may be serviced by the Seller, another originator of the assets or another party selected by the Seller
  • The collateral term sheets & structural term sheets are written & approved by the Seller, the depositor, underwriter & rating agencies, then distributed to investors for feedback on potential deal structure & pricing
  • The Seller & the underwriter finalize the pool of assets, transaction structure & terms of the securities;
  • The Prospectus is drafted & reviewed by all parties to the transaction including the Seller, depositor, underwriter, master servicer, servicers, trustee & rating agencies
  • The Pooling and Servicing Agreement (“PSA”) is drafted based on the final structure described in the Prospectus & also incorporates rating agency requirements & the general industry standards for a transaction
  • The Prospectus is finalized & distributed to investors prior to the closing date
  • The PSA & servicing agreements are finalized by agreement of the named parties in the document & rating agencies
  • The Seller offers the pool of assets as securities to the market & documents are filed with the Commission

13

v responsible party role
 V. Responsible Party Role
  • Responsible Party would sign:
    • 10-K Report
    • Sarbanes-Oxley Section 302 Certification
    • Assertion of universal compliance with criteria in attestation engagement
  • B. MBA concerns:
    • Does not reflect roles of participants in CMBS and RMBS worlds – transactions are structured to diversify risk, decision-making and responsibility
    • RP faces uncertainty and risk when determining “material compliance,” without additional guidance from the Commission
    • Would create conflicts and raise transaction costs as deals would have to be renegotiated/repriced
    • Would the proposed RP effectively be a guarantor as to performance of transaction parties’ responsibilities?

C. MBA Recommendation:

Division of responsibility for signing 10-K Report, Sarbanes-Oxley Certification and Assertion of Compliance should be a point of negotiation between the depositor and the master servicer

14

vi proposed attestation engagement
VI. Proposed Attestation Engagement
  • MBA Views
    • Proposed attestation engagement strong start
    • Preferable to separate industry engagements
    • Workable with some changes 
  • MBA Concerns
    • Overlapping servicer roles
    • RP could place conflicting demands on same primary servicers
    • RP (including master servicers) controls generally do not provide assurance to level of detail covered by servicing criteria
    • Timeline issues
    • Some criteria too transaction specific
    • Some criteria related to trustee functions
  • MBA Recommendation
    • Master servicers, and primary servicers that meet a certain threshold, should be required to engage an independent accountant to render an opinion on their individual compliance with servicing criteria at the platform level.
    • Then, the RP collects the attestation reports from each servicer and attaches a statement to the 10-K Report without rendering a judgment as to any servicers’ compliance.

15

vii general mba comments
VII. General MBA Comments
  • Materiality Guidance
  • Costs Associated with Compliance
  • Transition Period
  • Reissue Proposed Rule for Additional Comment

16

viii recap of industry recommendations
VIII. Recap of Industry Recommendations
  • DEFINITIONS
  • DISCLOSURES
  • RESPONSIBLE PARTY
  • ATTESTATION ENGAGEMENT
  • REISSUE PROPOSED RULE FOR ADDITIONAL COMMENT

17

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