The Slow March to End Securitization Inches Forward
In a feature in the very first issue of HousingWire Magazine, out this week, 15-year MBS/ABS veteran Linda Lowell tackles the question that's on most mortgage participants mind: is mortgage securitization dead? The complex answer to this question may very well lie with the Financial Accounting Standards Board and its coming proposals that will modify two separate but related standards that govern off-balance sheet securitization. FASB officials signaled Wednesday they were going to move forward with the process, and said in a media advisory that the group expects to issue exposure drafts to amend FAS 140 and FIN 46(R) "on or around" Sept. 15. "The proposed statement to amend Statement 140, would, among other things, remove the concept of a qualifying special-purpose entity and would remove the exception from applying Interpretation 46(R) to qualifying special-purpose entities," FASB said in the advisory. That's the crux of the issue for most in the mortgage secondary markets, and fears over what an elimination of the QSPE construct might mean for issuers sit front-and-center in the debate over capital adequacy at twin GSEs Fannie Mae (FNM) and Freddie Mac (FRE), as well as large commercial and investment banks. Which means that the industry will be waiting with baited breath to see the substance of the FASB drafts. Analysts have suggested that as much as $5 trillion would need to come back on the balance sheets of various financial institutions as a result of the proposed changes. Either way, some market pundits that have spoken with HW have said that eliminating "the Q" would also have the effect of killing most modern securitization markets -- or, at least, what's left of them -- since the transfer of risk off the balance sheet to a bankruptcy-remote entity is a critical part of the appeal of securitizing assets to begin with. Other sources have been more moderate in their views, however, suggesting that FASB's likely support for a so-called "linked presentation" approach wouldn’t necessarily remove the capital benefits associated with securitization of assets, but would provide for greater transparency to investors. FASB officials also said that in addition to proposals tied to the two accounting rules, it also will issue a third proposal, regarding any disclosures that would need to be made prior to the effective date of the above amendments. Officials agreed earlier this year to postpone the effective date of any changes until 2010, after investor furor over the effects of "killing the Q" starting in 2009 helped set off a dramatic sell-off in shares of both Fannie and Freddie; neither company has since recovered. FASB last tried to amend FAS 140 in 2005; but after receiving 53 comment letters, most of which objected to the changes, the group decided to head back to the drawing board. In a related vein, Financial Executives International reported Thursday morning that the International Accounting Standards Board will hold a series of roundtables centering on the on-balance-sheet consolidations of special-purpose entities (such as securitization trusts). The IASB said it hopes to have its own exposure draft on the subject during Q4. Editor's note: HW launched an industry-leading print magazine this month, providing the primary and secondary market's very first independent magazine covering the entire residential mortgage finance market. Click here to subscribe today; your subscription supports our efforts to bring you industry-leading news each and every day. Disclosure: The author was long FRE when this story was published; indirect holdings may exist via mutual fund investments, as well. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.