At its heart, the failure of the private-label residential mortgage-backed securities (PLS) market to return to its pre-crisis volume is a failure of trust. Virtually every proposed remedy, in one way or another, seeks to create an environment in which deal participants can gain reasonable assurance that their counterparts are disclosing information that is both…
Since 2015, a new tier of the private-label residential mortgage-backed securities (PLS) market has emerged, with securities collateralized by non-qualified mortgage (non-QM) loans. These securities enable mortgage lenders to serve borrowers with non-traditional credit profiles. The financial crisis ushered in a sharp reduction in mortgage credit available to certain groups of borrowers. Funding sources, such…
Weaknesses in securitization processes for mortgage loans contributed to the financial crisis of 2007 – 2008 and have led to a decade-long stagnation in the private-label residential mortgage-backed securities (PLS) market.
Although market participants have attempted to improve known weaknesses, lack of demand for private-label RMBS reflects investors’ reluctance to re-enter the market and the need for continued improvements to securitization processes to re-establish market activity. While significant issues still need to be addressed, promising advances have been made in the PLS market that improve information provided to investors as well as checks and balances designed to boost transaction performance.
Since the financial crisis began in 2007, the “Non-Agency” MBS market, i.e., securities neither issued nor guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae, has been sporadic and has not rebounded from pre-crisis levels. In recent months, however, activity by large financial institutions, such as AIG and Wells Fargo, has indicated a return to the issuance of Non-Agency MBS. What is contributing to the current state of the securitization market for high-quality mortgage loans? Does the recent, limited-scale return to issuance by these institutions signal an increase in private securitization activity in this sector of the securitization market? If so, what is sparking this renewed interest?
The data collected through the Capital Assessments and Stress Testing (FR Y–14) schedules provide the Federal Reserve with the information and perspective needed to help ensure that large bank holding companies (BHCs) have strong, firm-wide risk measurement and management processes supporting their internal assessments of capital adequacy. Information gathered in this data collection effort is used in the supervision and regulation of these financial institutions. Therefore, large BHCs should have internal controls that ensure the integrity of reported results.
The Federal Reserve Board (FAB) recently released regulatory guidance outlining its capital planning expectations for large financial institutions. The guidance addresses many areas of the capital planning process where regulators are looking for continued improvement within financial institutions and attempts to clarify differences in the Fed’s expectations based on firm size and complexity. The guidance is effective for the 2016 CCAR cycle.
While the execution of robust model risk governance processes are critical for all financial institutions performing annual stress tests, in many cases, the successful delivery of DFAST 2016 results will depend on the institution’s ability to execute as a team and implement disciplined project management approaches.
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Adequate Capital, But Expect More Capital Planning Scrutiny
The 2015 CCAR results reveal that, while most BHCs have adjusted their portfolios and implemented models that produce quantitative results consistent with regulatory expectations, qualitative processes that support the capital planning process should expect continued regulatory scrutiny over the coming years.
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Across the financial services industry, increased oversight has led to significant increases in expenses related to assessing and monitoring risk. We see over and over that institutions are weighted with significantly higher regulatory standards, but are not given commensurate financial resources. Model validation is an area where banks are incurring significant expenses to meet regulatory and internal requirements.
In response to client demand, RiskSpan makes the following recommendations to institutions that are looking to maintain the quality of the model validation process while reducing the associated costs.