The restoration of the private-label MBS market is being threatened by several regulatory efforts to re-engineer the entire "securitization machine," according to new Congressional testimony from the American Securitization Forum.
ASF executive director Tom Deutsch told the Senate Banking Committee Wednesday that new Basel III capital rules and accounting regulations (FAS 166/167) will have a “cumulative” effect on the securitization process.
Meanwhile, the Securities and Exchange Commission is working on a complete overhaul of the registration, disclosure and reporting requirements on the entire asset-backed securities market.
The securitization market fears it will be "destroyed by a thousand cuts," Deutsch said, such as the "premium recapture" provision in the risk retention proposal. To prevent an erosion of the 5% risk retention requirement, regulators have proposed that securitizers place all excess spread received at closing into a premium cash recapture account. This account would be used to absorb first losses on the underlying mortgages. Currently, securitizers pocket this excess spread.
This provision would "ultimately make the securitization business a not-for-profit business, effectively shutting down large down swaths of the RMBS and CMBS market," said the ASF chief.
Considering the complexity of the proposed rule and the thousands of pages of expected comments, "regulators should re-propose the rule to ensure they get it right,” he told the panel.
Redwood Trust president Martin Hughes noted that his firm issued a $238 million private-label MBS in March and expects to complete two more securitizations by yearend, but warned that the recapture provision has raised the ire of market participants. "We are hopeful that appropriate corrections will be made after the comment letters are received,” he said.
Hughes also testified that the 20% downpayment requirement for "qualified residential mortgages" that are exempt from risk retention does not protect investors, if the borrower can take out a second lien. "What have we really accomplished, if the borrower can take his or her own 'skin' out of the game,” Hughes told the committee.
"We believe this result will be very discouraging to private-label MBS investors, he added.
