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Seeking Transparency: US Government Asks Private Investors How to Fix Securitization

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In a rare move, members at many levels of the US government are meeting with securitization investors and industry trade groups to hammer out a strategy going forward to reactivate the private investor base of the securitization market. Early on in a Tuesday meeting, called Funding Mortgages and the Role of Securitization at President Obama's housing finance summit, it became apparent that the hammer will need to strike from many angles. Call it a working lunch: representatives from the NY Federal Reserve, FDIC, Office of the Comptroller of the Currency, the Committee on Financial Services gathered around a table in a tiny conference room on the fifth floor of the Treasury. Sitting next to them were representatives from investments banks and other private investor bases. Munching on the box lunches that are now considered a hallmark of the Obama administration, the government made it clear that reducing its exposure to the American housing markets is of tantamount importance. In order to do this, a much larger return of third-party investor money will be necessary. One panelist estimated that FHA represents 80% of the housing origination market and that a lot more competition would be welcome. The investors will need some more convincing. Lewis Ranieri of Ranieri & Co. was particularly outspoken on this point. For him, the enforceability of regulations will be key. He said that fraud remains rampant through the collateral. FICO scores drift negatively sometimes months after a mortgage is written, which could "only be true if there is a tremendous amount of leveraging up that is not natural," for the borrower. Of course, newly passed financial reform should address some of these concerns going forward. But, Ranieri said the final draft of the law seems watered-down. "Dodd-Frank is better than nothing, but it should be much better than nothing," he said. One overriding issue is where the borrower holds a second lien. Ranieri suggested making the restructuring easier in this regard, as even with short sales the second lien holder often blocks the sale. Tom Deutsch, the head of the American Securitization Forum, adds that Home Affordable Modification Program (HAMP) is also of little help in these instances. Going forward the private market seems satisfied that seconds will not be allowable without the consent of the lender of the first. Deutsch suggested that as private investor money starts to trickle back into the market, government-led competitors in the bond market, Fannie Mae and Freddie Mac, should "allow themselves to be crowded out," as Ted Tozer, the president of Ginnie Mae looked on from audience seating. Other balls were juggling in the air: should RMBS have b-piece (first-loss owners) investors as with CMBS, who can control the servicing of the assets to a larger degree and thereby removing the taxpayer as a potential loss holder? Is there confidence in risk retention, some form of comfort? Panelists agreed that it is not a panacea, and didn't see the logic in a 5% standard. Toward the end, the conversation once again return to regulation, marking the only long silence from the panelists. "With RMBS you need the SEC to be in charge," said Ranieri. The investors and the trade groups agreed that loan-loss provisions need to be reserved during the windup now, in order to cover for the bad times, Deutsch said. Alan Boyce of Absalon, a big promoter of the Danish RMBS model, said that the US will need to switch from FASB accounting to the Europe-wide IASB in order to meet this type of demand easier. With Basel 3 reform in the pipeline, not doing so will make it extremely difficult to be a mortgage originator in the United States, he said. Write to Jacob Gaffney.

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