The Milken Institute Center for Financial Markets published a new paper this week, COVID-19 Forbearance Relief and PLS: A Call for Self-Governance.
The authors, Eric Kaplan, Michael Stegman and Theodore Tozer, review private-label residential security (PLS) transactions, and call for the industry to demonstrate its capacity to self-govern by collaborating on a related set of uniform structural best practices.
Kaplan responded with a joint answer from the authors to Mortgage Media’s questions about the piece.
MM: Who do you hope reads your article?
We feel this article is a must-read for non-agency and PLS industry participants, mortgage market stakeholders generally, and policymakers who are focused on consumer and housing finance issues in the wake of the COVID-19 crisis. We believe the paper provides useful insight into the dynamics of providing COVID-19-related forbearance in PLS. We feel the PLS industry is fully capable of meeting the aspiration of delivering meaningful consumer relief through solutions that reflect PLS’s unique features.
MM: Why is it important for people to get this information?
Forbearance is borrower-focused relief intended to help homeowners struggling under the weight of COVID-19. As many in the market discussed in the context of hurricanes a few years ago, it doesn’t sit right if borrower eligibility for this much-needed, crisis-driven help is based not on need but on who owns the borrower’s mortgage loan. That’s secondary market-centric, not borrower-centric. PLS will face an uphill battle to defend itself if it is unable or unwilling to provide meaningful relief to help homeowners weather the COVID-19 crisis.
To determine whether a PLS trust allows forbearance relief and on what terms, the trust parties must evaluate the applicable governing documents and the intricate dynamics, details, and implications of providing relief. Industry stakeholders have the deepest understanding of these complexities and are already facing challenges and inconsistencies in fielding them. Failure to achieve consensus around and implement best practices in providing forbearance in PLS could impede borrower relief and expose PLS trusts and transaction parties to contractual, legal, and reputational liability. Furthermore, policymakers could impose requirements in the absence of industry action. If these requirements are one-size-fits-all, they could present severe unintended consequences that could rattle the non-agency market and carry legal and financial implications for PLS trusts.
So we tried to be proactive and call for the PLS industry to exercise self-governance. Through collaborative action, PLS stakeholders can help consumers during this time of crisis in a way that accommodates the legal, contractual, and financial complexities embedded in PLS. A meeting of the minds among PLS transaction parties, including bondholders, that yields consistent contractual interpretations and fair conduct would benefit consumers, industry, and the housing finance system alike.
MM: How confident are you that the PLS industry will accomplish appropriate collaboration and come up with a set of uniform best practices?
RMBS 3.0, the 5-year post-financial crisis industry task force seeking best practice reforms, was all-encompassing. Given the diversity of interests among PLS transaction parties and bondholders across the PLS capital stack, the effort couldn’t possibly and therefore never intended to achieve consensus. But it did prove the ability of the PLS industry to collaborate and identify challenges, dissect issues, craft solutions, and coalesce around best practices where possible. Drawing upon the lessons learned in RMBS 3.0, and by focusing just on forbearance early-on in this crisis, we are more hopeful that diverse stakeholders can see the value of coming together to help borrowers in ways that will maximize the long-term value of PLS trusts and the PLS market in general.