Investor Uncertainty Looms in Proposed FDIC Securitization Rule
New safe harbor rules for securitizations proposed by the Federal Deposit Insurance Corp. (FDIC) will create uncertainty among investors and hamper the reopening of the private-label securitization market as the federal government becomes set to withdraw for the market, according to industry trade bodies the American Securitization Forum (ASF) and the Mortgage Bankers Association (MBA). A trade association for the securitization industry, ASF penned a letter (download here) to the FDIC voicing this concern. Late last year, the FDIC approved an advanced notice of proposed rule-making regarding safe harbor protection of failed institutions’ assets being transferred for securitization. The FDIC's proposed rule revises a safe harbor on securitized assets of failed banks that the ASF said was originally meant to give investors peace of mind that the FDIC would not seize assets being transferred for securitization. Under the proposed new rule, the safe harbor would be amended to include numerous preconditions regarding a transaction's capital structure, disclosure, documentation, origination and compensation. “The sample regulatory text for conditions to a FDIC safe harbor would, I believe, go far towards correcting the weaknesses in securitization that contributed to the crisis and is very consistent with the direction of legislation in the House and Senate,” said FDIC chairman Sheila Bair in December. The ASF is asking the FDIC to not include all of the proposed requirements as a condition for safe harbor eligibility, and instead adopt "clear, bright-line conditions that allow investors to rely upon the safe harbor without fear that its benefits could disappear." "Under the FDIC’s proposals, investors will bear the burden of the loss of the safe harbor if any of the securitization preconditions are not satisfied by the sponsor." said Ralph Daloisio, chairman of the ASF Board of Directors, and a managing director at investment bank Natixis, in a statement. "As an investor, it is imperative that I be able to determine whether the safe harbor will apply so that risks can be appropriately assessed and a transaction can be efficiently priced." But the effect of the proposed safe harbor would not be limited to investors, the ASF said. The proposals could bring fundamental change to the economics of securitization for sponsors. ASF said the burden could even lead to the elimination of securitization in some sectors and prevent insured depository institutions from re-engaging in the securitization market. The MBA also penned a letter to the FDIC requesting a withdrawal of the proposed rule, saying it "threatens any semblance of certainty that was beginning to emerge in this important market." This certainty is essential to investors and lenders to make sound investment decisions. "As a result, financial institutions will be forced to add an uncertainty cost to their asset-backed transactions to offset the possibility their transactions may fall outside the boundaries of the FDIC’s receivership safe harbor," MBA said in its letter. "The specter of a delay in receiving cash flows from an FDIC receiver or conservator also will undoubtedly cause rating agency ratings to be heavily influenced by the financial strength of the servicer or master servicer of loans that underlie the private-label MBS." The Securities Industry and Financial Markets Association (SIFMA) also penned a letter, stating its newly-formed Securitization Group (SSG) does not believe the proposed safe harbor is the appropriate means to regulate the securitization market. SIFMA called the unilateral imposition of broad-based conditions on insured depository institutions by the FDIC "premature." It poses an undue burden on insured depository institutions and would front-run the large-scale, coordinated financial regulatory reform initiative currently being undertaken by Congress and other relevant regulators. SIFMA also urged that an insolvency safe harbor should be based on insolvency principles and should not impose requirements unrelated to insolvency. “Securitization is a key component to ensuring credit availability to consumers and businesses, and therefore plays a critically important role in the economic recovery," said SIFMA vice president Chris Killian. "Changes to regulation of the securitization market must be done in a coordinated manner which incorporates the views of various market participants, regulators and policymakers, and is mindful of the impact of the sum total of the changes on the ability of institutions to utilize securitization to fund credit creation.” In the near term, the Commercial Mortgage Securities Association (CMSA) urged the transition period bridging the old and new safe harbor requirements be extended beyond March 31, 2010, considering the amount of time that will be needed to formulate sound policy and the amount of time that will be needed to implement the new safe harbor requirements. SIFMA suggested the FDIC extend the interim period for the effectiveness of the 2000 Safe Harbor for at least six months beyond the March 31 date. The agency securitization market is anticipating the government's withdrawal when the Federal Reserve winds down its $1.25trn of MBS purchases by the end of March. Feds continue to dispute the time line of selling mortgage assets acquired under this program. Fed chairman Ben Bernanke has said a series of policy wind-down methods are being tested. The Fed may first drain excess reserves built up over many months through extraordinary asset-purchase programs, and then begin to raise the target for the federal funds rate. Or the Fed could pursue both options simultaneous to facilitate a quicker exit. Write to Diana Golobay.