FDIC Extends Safe Harbor Policy on Securitizations

The Federal Deposit Insurance Corp. has extended its "safe harbor" policy for six months while its board continues to work toward the adoption of new securitization standards. The safe harbor, which was due to expire March 31, assures investors that the FDIC will not seize or delay payments on securitized assets sold by failed banks and thrifts. The blanket policy applies to all securitized assets. But going forward, FDIC chairman Sheila Bair wants to condition this protection to securitizations that meet certain standards. In November, FDIC issued a proposed rule that outlines new securitization standards, which are designed to prevent a re-occurrence of the originate-to-distribute model that fueled the subprime boom. The standards include risk retention that would require banks to retain 5% of the credit risk when they securitize mortgages and other assets. The comment period on the proposal ended February 22 with the proposal drawing strong opposition from several industry groups. Even FDIC directors are divided on the issue. However, chairman Bair says she cannot ignore the losses FDIC has suffered due to the "misaligned incentives in mortgage finance. We hope to foster a sustainable securitization market that emphasizes transparency, improved clarity in transaction structures and responsibilities," she said. "We appreciate the board's decision to extend the existing Safe Harbor protection to September 30th," said Tom Deutsch of the American Securities Forum. "As our members indicated in our letter to the FDIC last month, the ASF strongly believes the proposals, which include significant preconditions for safe harbor protection, will create substantial uncertainty for investors, thus harming the drive to reopen securitization markets and get credit flowing to Main Street," the AFS executive director said.