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Peter Kempf is president and chief operating officer of American Mortgage Consultants (AMC). AMC is a full service due diligence and mortgage services company offering mortgage and consumer-related analytics. With over 14 years of secondary mortgage market experience, Kempf was instrumental in the development of AMC’s non-performing and distressed assets due diligence platform. He is responsible for strategic development and corporate vision, and provides executive oversight supporting all core business lines. Back in October, Standard & Poor’s added AMC to its list of firms that meets its criteria for third-party due diligence reviews of US RMBS. How did your approach earn you the distinction? AMC was able to demonstrate to S&P our independence and competence as a third-party due diligence firm. Utilizing experienced staff in all facets of credit, legal compliance and property valuation assessments, combined with our proprietary systems capabilities, continual staff training, testing and quality assurance policies, AMC met or exceeded S&P’s general criteria for assessing an independent third-party. What has changed since the start of the credit crisis in terms due diligence for securitization? First, we have seen increased samples that meet the rating agencies’ target sample size criteria. Also, rating agencies now assess the independence, competency and quality of the third-party review firms utilized. The reporting now entails more loan level data, and increased narratives attesting to the scope, procedures and findings. Finally we have seen tighter credit standards, as to be expected. Securitization, to many, worsened the fall of the housing market. Does this stance hold water, or is there a need for securitization? Sales of securities provided banks with immediate cash, which in turn they used to lend more. As lending accelerated, the underwriting standards were stretched. The availability of cheap, easy credit along with low interest rates, GSE demand/support for product, and the introduction of new exotic mortgage products increased the demand for housing and led to inflated housing prices. So yes, the demand among investors for MBS was one of many factors that contributed to the fall of the housing market, and the deflation of the housing market has led to tremendous declines in the values of MBS. However, in an environment with limited bank lending and capital markets access, and plenty of distressed assets on the balance sheets, securitization is an inherent necessity and vital funding tool supporting the housing market. While over-leveraged ownership is problematic, securitized financing is beneficial and critical to the economy assuming risk is properly accounted for and managed. Credit agencies take a lot of heat for their role in the crisis. What does the future hold for the big three, Fitch, S&P and Moody’s? Any restart of securitized markets will require substantial rating agency reform to re-instill investor confidence in the ratings. The agencies’ role is important to analyze the risk of the product compared to other debt obligations. However, it is the complexity, non-transparency and illiquidity of some securitized products, along with the lost confidence that needs to be addressed to attract investors in the future. SEC rating agency reform may diminish the future role of ratings, yet I feel restoring their credibility through simplicity and transparency could still be vital for the successful resurrection of securitized product markets. Ideally you would want the investors to hire the rating agencies, not the issuers – although this is unlikely with the big investors. Write to Jon Prior.
