Removal of Safe Harbor Hazardous to Securitization's Health
April 1, 2010
"It may not end up being all the same and the challenge for the industry is getting that consistency in place while introducing appropriate disclosure mandates for different reasons," Long said. "The reality is that investors want the changes on the regulatory front, but they don't necessarily want them to be tied together with Safe Harbor, which has its own role to play in increasing participation."
The Big Squeeze
As it stands, the Safe Harbor proposal could potentially squeeze the incentive out of securitization from banks, effectively wringing them out of the private-label market.
Huxley's Castro said that the next move the FDIC makes may determine whether these financial institutions would want to keep their place in the private label securitization market. "We are already seeing moves toward alternatives," he said. "In the credit card space, for instance, about $50 billion of the $130 billion of credit card ABS maturing will get securitized; the rest is going to be taken back on balance sheet until banks can determine the best funding solution. It ultimately means fewer bonds for investors and fewer alternatives for banks."
However, shutting out the banks doesn't translate to shutting down the private-label ABS market.
"In fact, there are many nonbank conduits still around to conduct mortgage-backed securitizations," said Falcon of Falcon Capital. "They will also look to enhance best practices in order to regain investor confidence in the MBS they issue. Any reduced MBS activity by the banking sector will be offset by an increase in the non bank sector."
Falcon said that it's important to also note that the FDIC has carefully considered if it is necessary to expand the scope of the Safe Harbor to securities that are carried on the bank balance sheet because of the new accounting rules.
"The FDIC has entered this with its eyes wide open to any unintended consequences. They fully understand the risk and they are well aware of the opposition," Falcon said. "With a new regulatory framework, enhanced industry best practices and greater investor awareness of the importance of sound mortgage underwriting, I think we will again see strong appetite for MBS."
He added that there will be many nonbank financial institutions positioning themselves to fill the void as the government slowly withdraws from the mortgage market. At this point, fully private-label RMBS transactions should start to happen.
Euro Regulations Less Harsh
The European Central Bank (ECB) and the Bank of England (BofE) are separately mounting efforts to regulate securitization. And unlike the U.S., these initiatives have not been met with the same industry opposition.
Why the regulatory environment in Europe has received a better response from the industry may lie with the scope of what these new proposals affect. Douglas Long, executive vice president in business strategy at Principia Partners, said that the requirements in Europe are more focused and are neither as strong nor as broad as those in the U.S.
"Take the ECB funding requirements, for instance. The new proposal is looking to get better loan-level details on collateral that is being used as part of the ECB repo window," he said. "The ECB is proposing that if you want to continue to use your securitization as collateral, then we need to know more about that asset."
In the U.K., the BofE has now also proposed that for banks to continue to use its discount window facility they must also be willing and able to satisfy more comprehensive transparency requirements, including cash-flow model and collateral pool stratification disclosure.
"All in all these proposals are a lot more targeted and can help instill best practices, both for issuers and investors," Long said. "If you want to get funding from central banks, you need to meet very specific disclosure requirements."
As Michael Krimminger, deputy to the chairman for policy at the Federal Deposit Insurance Corp. noted, globally regulators have mounted efforts to make sure players have more "skin in the game" risk-retention models. The European Union (EU) adopted its version last July and introduced the requirement of 5% risk retention by originators.
U.S. market pundits said that it is not clear that the country wants to follow Europe's lead on risk retention as it is a categorically different market that requires a different regulatory approach. It is also important to note that the EU hasn't tied up the idea of Safe Harbor with its securitization regulation.