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Clayton Holdings (CLAY)operates in the non conforming mortgage industry. There are three main business divisions. The first provides due diligence services for creators of MBS. In that role CLAY will review loans put in a pool and verify that the loans conform or do not conform to the pool's specifications. The second provides surveillance of MBS pools. In that role CLAY will look for patterns it has recognized in the past as consistent with fraud. If a fraudulent or non conforming loan is discovered the owners of the pool can put the loan back to the issuer. The company has been able to cover its fees by 3 or 4 to one ratio. The third is as a special servicer. In early 2007 the company received a special servicer designation from S&P. At the time only seven special servicer designations existed and nearly all were to subsidiaries of large financial institutions.
A major issue is regarding the work outs, i.e. when the lender compromises with the borrower to avoid default and repossession. Many non traditional loans, such as ARMs or interest only loans, were packaged together and sold in a security. As such, the security owns the loan and not the bank. There is specific language in the securitiztions that prohibits working something out with the borrower. Thus when the billions of dollars of ARMs renew from late 2007 to 2008, many will result in default and repossession that would have been able to be worked out.