Lessons Learned from the Crisis and Thoughts on a New Non-Agency Mortgage Target Operating Model

Abstract

Lenders and investors have not been able to put forth a non-agency residential mortgage-backed securities (RMBS) business model, citing such plausible reasons as regulation impacting both originations and servicing operations, Basel III capital rules, rating agency challenges, lack of clarity around rules governing representations and warranties, credit-crisis legal precedents still evolving, and to some degree, the non-financial costs of reputation, perception, and negative publicity. Successful architects of a new non-agency mortgage platform/targeted operating model will need to pay close attention to lessons learned from the credit crisis, converting those lessons into a business model and risk-mitigating enhancements. In this article, the authors examine the current struggles of the non-agency RMBS market, factors that contributed to the breakdown of this market, and possible lessons learned that could play a part in the reemergence of this industry. They focus on lessons learned and opportunities for improvement in underwriting procedures, servicing operations, securitization structures, and related business practices.