While a religious group was predicting the imminent Apocalypse last week, a set of financial services industry representatives were warning of the possible end to their own world — the collapse of the securitization market.
They worry that a deluge of new rules coming down the pike — including risk-retention requirements, proposed Basel III restrictions, Volcker Rule limitations and enhanced derivatives regulation — will make it virtually impossible for the private market to return.
"It is in effect the securitization markets' greatest fear is not to be damaged by one slice of the sword but in fact to be destroyed by a death of a thousand cuts," Tom Deutsch, executive director of the American Securitization Forum, told a Senate Banking Committee hearing last week.
Many of their claims remain controversial, with some observers skeptical the new rules will turn out to have so dire an impact. But at least one policymaker, Acting Comptroller of the Currency John Walsh, was voicing similar worries last week about the pending rules and enforcement actions that will impact mortgage servicing.
"There are 15 to 20 new mortgage lending requirements in the regulatory pipeline, and their impact on the mortgage and servicing businesses will be more tsunami than simple wave," Walsh said in remarks to the Financial Services Roundtable's Housing Policy Council.
The chief worry for many industry representatives remains how the risk-retention proposal will affect the securitization market. Under a proposal released by the federal banking regulators, lenders would have to retain 5% of the credit risk of loans they securitize in order to offset the problems seen during the financial crisis where incentives emphasized volume over quality and easy fees over long-term viability.
Some lawmakers said that such a change was needed to fix the system.
"We only need to look at the residential mortgage markets to see how badly things will go if securitization is not executed carefully," said Sen. Jack Reed, D-R.I., who chaired the hearing last week on the state of the securitization market. "The mad rush to cut corners led to an eventual freezing of the securitization markets as investors lost confidence and drastic government intervention was necessary to prevent the evaporation of liquidity and allow access to credit to continue for many consumers and businesses."
While those in the industry acknowledged past failures, however, they argue the proposed solutions go too far, and may not ultimately prevent financial risk to the system. They claim that many lenders will only make "qualifying residential mortgages," which require at least a 20% down payment from borrowers and compliance with certain debt-to-income ratios.
Some industry representatives argued the criteria was too strict and would result in reduced availability of mortgage credit.
