Will Risk Retention Hurt the Securitization Market?

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Securities issuers are increasingly worried that risk-retention requirements could hinder efforts to broaden the types of loans securitized through the private-label market as implementation for the new regulation nears.

Since the market recovered from the financial crisis, some issuers and market participants have positioned themselves for new private securitization and expansion into slightly riskier products for which they can charge a premium.

The private-label securitized market has grown since it shut down during the financial crisis but annual issuance is just tens of billions of dollars, as opposed to hundreds of billion pre-crisis. It consists only of very pristine loans too large to meet government loan limits. At the same time, the government-sponsored enterprises' recent expansion of loan criteria have shrunk private-label issuers' optimism.

"Anyone who is thinking of issuing, it is not for the faint of heart," Cameron Beane, secondary marketing director at EverBank, told the Mortgage Bankers Association's Secondary Market Conference last month.

He said EverBank issued two deals in 2013 and issuing wasn't easy then, but "it's even gotten more complicated."

But a new risk retention rule, which is slated to take effect on Dec. 24, challenges issuers' hope that certain loans can be securitized at a profit. The Dodd-Frank Act required lenders to retain at least 5% of a loan unless it was considered a "qualified residential mortgage."

Regulators later defined that criteria to mean any loan that was considered a "qualified mortgage" under the Consumer Financial Protection Bureau's mortgage origination rules.

Though the QRM-QM exemption effectively would capture most of the existing mortgage market, issuers fear they will have difficulty securitizing any loans that fall outside that definition.

"It can be legally done. It remains to be seen whether an active market can develop," Kenneth Kohler, an attorney at Morrison & Foerster LLP, said during a panel on securitization regulation at the conference.

Some issuers such as REIT Redwood Trust have voluntarily retained risk on their deals.

But being required to retain risk will hold issuers to a different standard that may be tougher to address, said Scott McNulla, vice president of regulatory compliance at due-diligence provider Clayton, in an interview.

"There's a difference between 'choose' and 'forced,'" he said.

There is a possibility non-QM lending will grow outside the securitized market through private whole loan funding and trades as nontraditional lenders such as those in the peer-to-peer space grow but "it's hard to say if there's going to be a sweet spot there," said LeRoy Pingho, chairman and CEO of Overture Technologies, in an interview.

Lenders are making some non-QM loans and warehouse lenders are funding them, said Stanley Street, owner of Street Resource Group Inc.

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