Securitization Regulation is Raining Like Thunder
In an effort to get the securitization market going again, panelists at the American Securitization Forum (ASF) 2010 in Washington say multitudinous new requirements in global economies - that are once again beginning to meaningfully grow - presents perhaps the largest challenge to rebuilding structured finance. In a morning talk on the first full day, Jason Kravitt, a senior partner at law firm Mayer Brown, said the new regulatory initiatives are "raining like thunder" on the industry. The image prompted by that description is one of the industry possibly heading to a storm of regulation. David Nason, a managing director of Promontory Financial Group added that policy makers must appease two opposing forces: building investor confidence by establishing strong rules and guidelines versus "the other objective of getting credit flowing again." Before the credit crisis, securitization played a large part in driving funding for the origination of mortgages. Today, most of that market is replaced with Federal Housing Administration (FHA)-backed loans. The ASF is keen on getting back to the former, though attendees remain uncertain of the extent of the market's capability to drum up business outside the regulatory space. In short, it's play by the rules, or don't play at all. Valuations of assets and related mortgage-backed bonds remain a challenge with standards provided by accounting standards established by International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) diverge on the standards of determining fair-market value. On top of that, issuers must re-risk weight for BASEL II requirements. And new legislation will likely establish a 5% risk retention minimum, the so-called skin in the game issue, which continues to raise questions. "Is this the right amount of capital? How do we determine what the right amount of capital is?" asked Hal Scott, director of the Program on International Financial Systems at Harvard University. "Market discipline was sort of lost in the shuffle, and we have to solve too big too fail, but do we want accounting rules to drive regulatory capital?" All of these new requirement will add up to more and more capital needed to perform even the most simplistic deals, market players say here. Further, Steven Joachim, an executive vice president of transparency services at the Financial Industry Regulatory Authority said broker-dealers would need to report activity to his office. "We have a plan to look at these complex instruments," he said, adding that as of March 1 the Financial Industry Regulatory Authority (FINRA) database will be updated to handle the new tasks. "We recognize this is not a smooth transition. It effects both buy-side and sell-side," said Joachim. "We will give time to those who need to adjust. Firms that can adjust quickly will be the most successful." Investors, for their part, are calling for more transparency on the buy-side of the market. "The ability to get an address on a property or an indication if a borrower takes out second lien, I would like to know these things in order to make my decisions," said investor William Moliski of Redwood Trust, who thought 5% risk retention was already an industry standard, though he remained uncertain what it would offer him. "They give us a small box to think about. Securitization allows investors to participate at various credit levels. But what is this slug of money there for? A first loss piece for investors?" Write to Jacob Gaffney.