ASF: Buy Loans Out of Securitization Trusts
While interim assistant Treasury secretary for financial stability Neel Kashkari was busy being dressed down by lawmakers in a hearing Friday -- and stole most of the financial press' headlines, as a result -- mortgage market participants should probably pay much more attention to the ideas emanating from the American Securitization Forum. The reason: the group is suggesting that Treasury purchase individual loans out of securitization trusts as part of the Troubled Asset Relief Program, or TARP. The surprising suggestion, which comes after Treasury secretary Henry Paulson said Thursday that TARP funds would not be used to purchase troubled assets off the balance sheets of banks and financial institutions, is telling -- precisely because the Treasury seems to have signaled earlier in the week that asset purchases are off the table. So why keep pushing now? “Historically, whole loans have not been sold out of securitization trusts by servicers for a variety of legal, tax, and accounting constraints,” said Tom Deutsch, deputy executive director of the American Securitization Forum, in testimony Friday to a subcommittee hearing within the Committee on Government Oversight and Reform. “The ASF supports, where feasible, facilitating such purchases as part of a broader range of loss mitigation alternatives, and has recently undertaken a review of the various opportunities and obstacles for servicers to sell below par individual distressed loans out of MBS to the TARP.” Parsing Treasury's stance Understanding why Deutsch would continue to push this option after the Treasury signaled other priorities for TARP funds requires a close reading of Paulson's actual words from earlier this week: he said Treasury would not be looking to buy mortgage-related assets, for one thing, rather than specifying mortgages outright. Which means nearly everyone has realized the troubles involved in trying to sell securities, but may have also realized that selling loans out of a trust might be feasible (at least from a preserve-the-balance-sheet sort of standpoint). Most securitization trusts are (for now, at least) off-balance sheet entities, and selling loans out of the securitized pool, rather than the securities backed by them, could possibly avoid the mark-to-market headaches that would come with outright RMBS and CDO sales. Note also that the Treasury secretary also suggested that focus going forward will be placed directly on stimulating growth in the securitization markets; and while the focus here is on consumer ABS, Paulson did note that Treasury would consider a program for residential mortgages, as well. That program is likely to involve some form of financing for repo operations, as Paulson suggested, but is it possible that it might also involve clearing bad loans out of securitization trusts? Right now, that's anyone's guess. But the fact that ASF's Deutche continues to push the subject after the fact -- not to mention various memorandums HW has been been privy to, under an agreement not to circulate -- suggest that Treasury officials may at least be considering the idea. And the goal, of course, is to coax buyers back into securitization markets, restoring lending activity. The sale of distressed loans to third parties has not typically been a loss mitigation option that servicers had available to them when dealing with private-party securitizations. But unless the securitization servicing agreement prohibits the sale of these types of loans, and as long as appropriate relief from the accounting and tax consequences is obtained, the ASF said it would consider reinforcing a market practice that the servicer be permitted to consider such a sale as one option among the loss mitigation techniques it may consider when deciding which course of action to pursue with a defaulting loan. “Adding the sale option, of course, does not change the servicer’s responsibility to analyze what loss mitigation strategy is optimal to pursue,” Deutsch said in his testimony. “Ultimately, the servicer’s decision must still be based on its analysis of which approach would result in the maximum net proceeds, or net present value basis, to the securitization trust.” Deutsch also backed Federal Deposit Insurance Corp. chairman Sheila Bair's proposal to see the government guarantee loan modification redefault risk (see story), and suggested that TARP funds be used to provide lender or guaranty facilities for servicer advances. Servicers are being squeezed by capital needs as defaults rise and the need to advance funds to investors eats away at available cash, something we've covered in the past. All three ideas -- loan purchases, assumption of recidivism risk, and funding servicer advances -- would support the Treasury's stated objective of mitigating foreclosures, Deutsche argued. Write to Paul Jackson at email@example.com.