A recent residential mortgage-backed securities deal backed by investor loans has some stakeholders saying that electronic promissory notes are about to gain significant traction in the small
The deal, RCKT Mortgage Trust 2024-INV1, is the first private securitization in the jumbo market to include "a significant portion (approximately 27.9% by balance) of loans associated with electronic promissory notes," according to Moody's Ratings.
The move by Rocket, which has a history of being an influential first-mover, could mark the beginnings of e-note use becoming established for private-label RMBS, according to Chris McEntee, a vice president in Intercontinental Exchange who works with its mortgage registry.
"It's really something we've been working for and striving for as an industry for almost more than a decade, and the final pieces of the infrastructure are moving into place," said McEntee, who works in product and corporate development at ICE Mortgage Technology.
Private market acceptance of e-notes has been anticipated given advances in the broader government-sponsored enterprise and
"That's what we had predicted when we put out a paper where we said that we expected the first wave of deals to likely be done by those who are already delivering to the GSEs under this kind of established process," he said.
But prior to the Rocket deal and with the exception of the GSEs' credit risk transfers — which are sometimes considered part of the private market — there had typically only been a handful of e-notes in PL RMBS, if any at all.
"Part of it may be investor acceptance," said Sonny Weng, a Moody's vice president.
The broad usage of e-notes in the recent securitization could help remedy that, Bill Banfield, chief business officer at Rocket Mortgage.
"We hope that our process that got out there will show that this is workable, standardized, and the same thing that's being done on GSE loans," Banfield said.
Because the deal was well received, an e-note-heavy closed-end second-lien securitization may follow, he said.
In vetting the securitization of one-to-four family residential investor loans against "unauthorized transfers," analysts looked at the custodian and e-vault that the rating agency noted were each respectively "GSE approved."
The market has come a long way since the Great Recession in the 2000s and its aftermath, when there were
"Court rulings since then have validated the enforceability of e-note foreclosure. In addition, e-note servicers we reached out to about their experience enforcing e-notes did not flag any issues," Moody's analysts said in the report.
The researchers also said that e-notes could create servicing efficiencies, and had proved helpful in avoiding
"Digital loan origination reduces the loss of paper documents," Moody's noted in its report.
The e-notes in the Rocket transaction also were deemed to have some deterrents to mishandling.
The custodial arrangement involves "safeguards against unauthorized transfers," according to Moody's. Additional protection comes from specific representations and warranties Rocket provides for the e-notes, which require remedies or repurchases for defects.
In addition to being notable from an e-note perspective, the deal reflects the private market's ability to provide competitive pricing for GSE-eligible investor loans and is Rocket's first securitization of this type, Weng said.
