The American Securitization Forum stated in a letter filed with the Federal Housing Finance Agency that while it supports the efficiency of a single-securitization platform for Fannie Mae and Freddie Mac to both utilize, but some concerns remain.
The ASF argues that extending the platform for private securitizations could introduce various issues involving credit risk, which the FHFA should take into consideration.
The proposal aims to bring private capital back to the mortgage market by facilitating risk-sharing transactions through a single platform, with a portion of the credit risk sold to private investors.
Although the ASF supports the proposal’s goals, there is a primary issue of the investor base shifting from rate investors to credit investors once the government-sponsored enterprises depart from a guaranteed model and begin to offer credit risk.
“Credit investors in a risk sharing transaction will likely seek many of the same protections as those sought by investors in private label RMBS, including an independent trustee, different enforcement mechanisms for representations and warranties, more robust disclosure and pre-issuance due diligence,” said ASF Executive Director Tom Deutsch.
The ASF also encouraged the FHFA to look at its Project RESTART initiative as the federal agency considers standardizing transactions where credit is sold.
The forum cautioned that the type of wholesale standardization the FHFA anticipated in the single-securitization platform for the GSEs is not very useful for private real-estate backed mortgage securitized transactions.
“The work on ASF’s Project RESTART confirms our belief that while there is a desire among private market participants for model standards and practices on specific topics, wholesale standardization of offering and operative documentation for private label RMBS is likely not feasible,” Deutsch said.
He added, “When credit risk is sold, the incentives and potential liabilities among transaction parties change, resulting in transactions that differ in structure, governance and disclosure.”
The ASF letter is in response to a 2012 white paper, titled “Building a New Infrastructure for Secondary Mortgage Market. The paper released on Oct. 4 proposed standardization through the use of a single platform and a model pooling and servicing agreement.
