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FDIC Safe Harbor Changes Could Risk Investor Confidence

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The Federal Deposit Insurance Corp. (FDIC) board of directors today approved a Notice of Proposed Rulemaking (NPR) to clarify the safe harbor protection for failed bank assets being transferred for securitization. The proposed changes are already being greeted by critics in the industry that warn investor confidence -- and the future of securitization -- could be on the line. The FDIC is proposing a 5% reserve fund for residential mortgage-backed securities (RMBS) to cover potential put backs during the first year of the deal, rather than the prior 12-month seasoning requirement. The FDIC is proposing required disclosure of any competing ownership interests in secondary liens secured by the same property and held by the servicer or its affiliates. The proposals include a requirement that deferred compensation be paid only to the rating agencies, rather than all service providers. "The market is clearly trying to find a new securitization model, with investors placing a premium on transparency throughout the process," said FDIC chairman Sheila Bair in a press statement. "With the system awash in cash, investor appetite is coming back. Now is the time to act to put prudent controls in place before the significant issues we saw during the crisis return." The FDIC said its proposed risk retention requirements are aligned with those proposed by the Securities and Exchange Commission (SEC). Additionally, the FDIC said compliance with the SEC's new Regulation AB will satisfy the disclosure requirements within today's NPR. The Comptroller of the Currency John Dugan in a statement responding to the FDIC's announcement, said he "cannot support today's" NPR, partly because it establishes disclosure rules that differ from the SEC's disclosure rules. Dugan also said Congress is considering a provision to address the same issues brought up in the NPR, but in a more comprehensive way that would apply to all securitizers, not just bank securitizers. Additionally, Dugan said the NPR only applies to banks, and not to affiliates or nonbank securitizers, which creates an un-level playing field that disadvantages banks and "creates incentives for evasion by conducting securitizations outside of banks." He also said the NPR does not seek to improve mortgage underwriting standards at the source -- by regulating minimum standards. Risk retention could be lowered, Dugan noted, if underwriting standards were regulated directly. "The resulting uncertainty about possible future outcomes could be a significant deterrent to investor interest in buying securitized loans in the first instance -- the very outcome we are trying to avoid," he said. Richard Dorfman, managing director and head of the SIFMA Securitization Group (SSG) said the NPR could potentially hamper a recovery in the securitization markets. “Some of the FDIC’s proposed rules … could be detrimental to the re-establishment of well-functioning securitization markets," he said. "We are also concerned that the proposed safe harbor is not an appropriate means of regulation, in that substantive regulation of securitization market activities would be effected through the FDIC's insolvency regime, which could potentially create an unlevel playing field for bank issuers." The Executive Director of the American Securitization Forum (ASF) Tom Deutsch said that, despite the FDIC's assurances it is committed to working closely with the SEC to ensure a level playing field with the Reg AB, a level of uncertainty among investors may remain. "The safe harbor means that applicable securitization assets will not be seized by the FDIC in the case of issuer insolvency," said Tom Deutsch tells HousingWire. "But disclosure regulations such as these may be better left to the SEC rulemaking as it could potentially cause uncertainty to investors as to the enforceability of the safe harbor." The NPR is open to public comment for 45 days following its publication in the Federal Register. Write to Diana Golobay. Additional reporting by Jacob Gaffney.

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