New U.S. private-label residential mortgage-backed securitization would have picked up in late 2010 if the slew of developing regulatory requirements taking shape weren’t out there, Jordan Schwartz, partner, Cadwalader, Wickersham & Taft LLP, told attendees at listeners to a webcast American Securitization Forum meeting last month. “Now I’d have to push that back another year because, until the shifting the shifting regulatory sands start to solidify a little bit,” he said. “It’s just very hard for people to make decisions and people to plan even if their appetite to invest is there.”
Also, Fannie Mae and Freddie Mac remain “the elephant in the room” when it comes whether private-label RMBS will come back, Schwartz said, noting that they have “squeezed out the private market almost in its entirety.”
Interestingly, however, private-label securitization in other areas where there are not government-sponsored or government equivalents to serve funding needs has made more of a comeback. Susan Thomas, associate general counsel, Ford Motor Credit Co., said that the auto market, for example, is one of few areas truly back to pre-crisis era deals. “We will securitize because we need to. We don’t have a lot of other funding options,” she said, noting that the process hasn’t been easy, requiring lots of personnel to analyze transactions.
In the RMBS market, “Confidence is really what we don’t have enough of yet” to revive residential mortgage securitization, Jim Mountain, partner, Deloitte & Touche LLP, said, noting that this is true of both consumer and business market participants as well as regulators.
Mountain said that also a continuing hurdle are accounting rules that have made it a lot harder to get off-balance sheet treatment of securitization in general. Because of these rules, players would likely be those that are insensitive for one reason or another to having securitized assets on balance sheet. These might include bank issuers, hedge fund investors, mutual funds insurance company investors and special servicer and b-piece investors.
It’s not impossible to get “the old result” of off-balance sheet treatment, he said, but because of the accounting rules it would require an extra layer of cost and effort to arrange deals that are not on anyone’s balance sheet. “Some of that technology will have to be invented,” he said. He said it hasn’t been yet, but “smart people are thinking about it.”
Then, Mountain added, there is the issue of regulatory capital, “which had perhaps driven a lot of securitization recently,” and is something banks, for example, must consider. Because of the accounting difficulties in achieving off-balance sheet treatment, “we could very well end up in a situation where securitization is perhaps neutral from a regulatory capital standpoint as compared with other funding mechanisms,” he said.
The layers of factors complicating securitization continue with the evolution of the Basel international banking rules. Interestingly, this is creating a situation where—among other things—higher risk weighting factors will be applied to resecuritizations, Paul Vambutas, a managing director at UBS AG, said. Resecuritizations comprised much of what “new” private-label U.S. RMBS issuance there was in 2010.
Among the slew of other regulations not even mentioned in this week’s column, but mentioned plenty often in this space in the past year, also are other rules that complicate resecuritization, Schwartz said. So it will be interesting to see how even that market addresses that challenge in 2011.
