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Sheila Bair: Bring securitization practices back in balance

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Federal Deposit Insurance Corp. Chairman Sheila Bair says she wants to see the securitization market come back, but it needs to come back with balanced, sustainable practices. Securitization can be a good way to take illiquid assets such as mortgages and package them in a way that creates additional funding and manages credit risk. But leading up to the 2008 national financial crisis, securitization “became a volume business, and no one was maintaining skin in the game,” Bair said. “No one was watching whether the mortgage would perform over time.” Bair spoke at the annual Securities Industry and Financial Markets Association, or SIFMA, conference in New York. She was interviewed by veteran broadcaster Charlie Rose. The FDIC is seeking good loan-level disclosure for investors so that investors can value the mortgages without relying solely on credit agencies. It also has been looking at realigning servicing incentives and developing strong underwriting standards. The FDIC recently adopted a new rule on securitizations that requires that servicer incentives be addressed to obtain safe-harbor status. Servicing agreements must provide servicers with the authority to mitigate losses in a timely manner and modify loans to address expected defaults. Bair noted the financial industry has concerns about the new risk-retention rule under financial reform that requires issuers of securitization to retain 5% of the ownership, thus sharing in any losses. Regulators are still working out final risk-retention rules. On bank failures, Bair said 143 banks have failed so far this year, and said she expects the number to peak this year. The dollar-value of failures will be lower than those in 2009 as 2010 has seen more smaller bank failures, she said. “The banking system is healing,” she said. “It is a necessary process.” Recent foreclosure issues involving robo-signing will be largely handled by state attorneys general, but Bair said there are related issues that the FDIC should consider, including looking at title transfers and whether the appropriate modifications have been considered. Write to Kerry Curry.

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