Trade groups have largely welcomed what's broadly more lenient treatment of securitizations in their comments on the latest U.S. Basel III endgame proposal, but some want to change certain details they fear could cause friction for home loans.
"The revised proposal reflects meaningful progress, including on several issues that are critical to the securitization market. That said, the latest proposal does introduce some new challenges," Structured Finance Association CEO Michael Bright said.
Bright welcomed changes like the removal of a previous-proposed increase in a capital multiplier for securitization in an SFA comment letter, but said he had concerns about "unintended consequences" from the rule, including some impacting mortgages.
One of these is a proposed increase in what's currently a 20% risk weight floor for resecuritizations to 100%, which would apply to senior variable funding note deals servicers use to
"This would not only limit the ability of mortgage servicers to provide future forbearance in times of need (as they did during the COVID pandemic), but it would also increase servicing costs," Bright said.
More challenges for warehouse lines
An additional mortgage-related concern SFA cited in its commentary on structured finance impacts were definitions for residential and commercial real-estate exposures that assume the bank involved originated and underwrote the loans involved.
"These definitions disadvantage banks that acquire whole loans or participations in the secondary market, banks that provide warehouse financing secured by pools of residential or commercial mortgage loans, and banks that invest in mortgage-backed securities," Bright said.
Other warehouse financing concerns trade groups have identified in the proposal is language that limits the definition of traditional and synthetic securitizations to transactions that "solely" depend on "the performance of the underlying receivables."
That new definition could omit the lines of credit banks provide to nondepository mortgage lenders from the definition if they have an originator or sponsor guarantee as some warehouse facilities do, according to SFA's comment letter.
"Sponsor-provided guarantees should not automatically disqualify treatment as a 'securitization'," Bright said.
Calls to recognize other MBS distinctions
SFA also suggested that the reproposed bank capital rule take into account longstanding
In line with that thinking, the groups suggest government-backed loans "be expressly excluded" from the numerator for the "W" parameter, which otherwise negatively impact calculations for the part of the pool that's seriously delinquent or in nonaccrual status.
"This clarification would more appropriately align the capital requirement with the economic reality that these exposures benefit from government credit support that substantially mitigates the risk of loss to securitization investors," Bright wrote.
Separately, the Mortgage Bankers Association had a concern involving part of the proposal that could counterintuitively allow securitizations that government-sponsored enterprises held in conservatorship back to receive more capital relief than private MBS.
MBA is recommending a change to wording in the Basel plan that lowers the risk weight floor for senior tranches of private residential mortgage-backed securities
President Bob Broeksmit suggested officials could end "competitive disparity with the private-label floor" by reducing the risk weight for senior GSE debt from 20% to 10% while the enterprises are in conservatorship or otherwise retain U.S. Treasury backing.
The Commercial Real Estate Finance Council echoed this concern and suggested policymakers "equalize the 15% floor for comparable government-sponsored enterprise (GSE) exposures during conservatorship."
CREFC, which also shared the Structured Finance Association's concern about the defining securitizations as transactions relying "solely" on underlying receivables, suggested this could be remedied by using the word "primarily" instead.
