FDIC extends Safe Harbor through end of year
The Federal Deposit Insurance Corporation elected to extend safe harbor protection of securitized assets through the end of the year, which at least one observer feels will hinder private-label asset-backed securitization.
Last summer, the Financial Accounting Standards Board changed accounting rules so most securitizations no longer met the off-balance sheet standards for sale accounting and, consequently, don't comply with preconditions for FDIC safe harbor protection. The safe harbor protection was set to expire this week.
Under Dodd-Frank, the FDIC received powers to resolve a failing financial company that poses a significant risk to the financial stability of the U.S. Some ways the FDIC may resolve a too-big-to-fail entity include dividing and securitizing assets; create a bridge company to maintain critical functions until winding down is complete; putting assets into a covered bond if legislation passes allowing as much; or possibly creating a 'bad bank' and funneling assets to it.
"If appointed as receiver for a failing systemic financial company, the FDIC has broad authority under the Dodd-Frank Act to operate or liquidate the business, sell the assets, and resolve the liabilities of the company immediately after its appointment as receiver or as soon as conditions make this appropriate," Chairman Shelia Bair said. "The ability to act quickly and decisively has been found to reduce losses to creditors while maintaining key banking services for depositors and businesses."
Bair said the FDIC has struck a balance between protecting its fund balance and a more transparent securitization market. And the safe harbor rule is consistent with the Dodd-Frank mandate that calls for a 5% risk-retention requirement for loans lacking "sufficiently strong underwriting standards…to counter incentives for lax lending created by the originate-to-distribute model."
"The FDIC is seriously harming the federal government’s ability to exit the U.S. housing market and reestablish a private mortgage market," according to Tom Deutsch, executive director of the American Securitization Forum. "Securitization is key to virtually every plan for reducing the role of the GSE’s, including Fannie Mae and Freddie Mac, and restoring a private housing market."
But today's extension of safe harbor "will make it extremely difficult for new bank-sponsored securitizations to occur" and "disrupt contractually scheduled repayments of investments in the case of a bank failure," he said.
Although Bair thinks otherwise.
"We want the securitization market to come back," she said. "But in a way that is characterized by strong disclosure requirements for investors, good loan quality, accurate documentation, better oversight of servicers, and incentives to assure that assets are managed in a way that maximizes value for investors as a whole."
Deutsche said institutional investors, such as pension funds and mutual funds, stand to lose the most from today’s actions by the FDIC. He also said the FDIC action will push securitization to unregulated non-bank organizations, and the agency is acting "ahead of other regulators in an uncoordinated manner," which could create confusion in the marketplace.
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