SEC seeks to protect debt security investors

By Rachelle Younglai and Al Yoon

WASHINGTON/NEW YORK (BestGrowthStock) – U.S. regulators are considering a plan that would prevent banks and other sponsors from selling asset-backed securities without assuming any risk themselves, sources familiar with the Securities and Exchange Commission’s approach said on Tuesday.

The SEC is mulling a proposal that would require asset-backed security sponsors to retain 5 percent of the credit risk of the security, said the sources, who requested anonymity because the plan is still in flux.

The SEC proposal under consideration would also require banks and other ABS issuers to disclose in-depth information on every loan in a mortgage-backed security, the sources said.

The proposal brings the securities regulator in line with the Obama administration’s plans to try to prevent banks and other financial players from selling shoddy financial products to investors.

Restarting securitizations is seen at the heart of economic growth since the $9 trillion market that relies on investors to take the risk away from issuers. It is key for the U.S. housing sector where regulators are hoping private investors such as pension funds will provide support strong enough for the government to be able to reduce its role.

The market’s rebirth has been elusive amid disagreements over how best to enhance the process for investors without killing off economic incentives for issuers.

Last week, a group of 21 banking and real estate associations warned of additional costs issuers may have to bear if they were forced to retain a percentage of every bond, or have “skin-in-the-game.” Because of accounting rules, banks may have see additional capital requirements, they said.

“Skin-in-the-game is a double-edged sword,” said Scott Buchta, a strategist at Guggenheim Capital Markets in Chicago.

More capital from the issuers will give them more incentive to make sure bonds contain safer loans, but banks may then limit the amount of credit they make available to marginal-quality borrowers, he said.

Banking lobbyists in their letter to key senators last week reminded Congress that structured finance markets have provided 40 percent of credit in the United States over the past 15 years. Proposed “risk retention” is among the “multitude of challenges” on banks that could reduce lending, said the groups, including the American Bankers Association and the Mortgage Bankers Association.

The SEC is considering requiring banks and issuers to disclose information on whether a home loan was underwritten with full documentation, for example, and where the home is located, the sources said. A group of mortgage investors recently urged Congress to consider loan-level data be made available, noting that they could reduce reliance on the bond rating companies that were slow to warn of credit doom.

Asset-backed securities linked to credit cards would not require information on every single credit card loan because of the sheer size of the pool, the sources said.

The SEC plans would apply to virtually all asset-backed securities that are registered with the SEC, the sources said.

Issuers of private asset-backed securities would be required to disclose information about the underlying assets to prospective investors, the sources said.

The Federal Deposit Insurance Corp is also trying to spark the securitization market by bringing higher standards to the industry, aiming to calm concerns that securitized products are too risky.

Stock Today

(Editing by James Dalgleish)

SEC seeks to protect debt security investors