US securitization group urges regulator flexibility

By Al Yoon

NEW YORK, June 8 (BestGrowthStock) – Securitization proponents on
Tuesday said they are concerned sweeping financial regulation
reform could produce “hard wired” legislation and limit the
flexibility of regulators to deal with unintended

The concerns come as bond dealers, investors and others
that buy and sell securitized assets such as credit card cash
flows and property mortgages are hunkered down in Washington
D.C. to ensure pending regulatory changes will be as painless
as possible to the industry which provides credit to consumers
but also produced securities that contributed to the global
financial crisis in 2008.

Reviving securitizations, especially for residential
mortgages, is seen as crucial for America to wean itself from
the government-supported lending that has come to dominate as
the financial crisis turned investors away. Industry groups,
such as the American Securitization Forum (ASF), appear
resigned to added regulation but are redoubling efforts as
lawmakers merge competing House and Senate bills.

“We’ve got a tremendous amount of work left to do,” Tom
Deutsch, executive director of the ASF said at the group’s
annual meeting in New York.

Securitizations are important credit sources for other
facets of the economy as they funnel investor cash to auto and
credit card lending in addition to commercial and residential
loans. But under existing regulation, the $11 trillion industry
ushered through billions of dollars in volume at the expense of
sound underwriting and awareness of understanding of

Among reforms that may hinder securitizations include a
Senate amendment setting up a board to choose credit rating
companies on structured bonds, in an attempt to prevent a
conflict of interest seen between raters and issuers. By
“ratings shopping,” issuers in the past have been able to go to
the rater with the least onerous requirements for the top,
“AAA,” designation.

A better alternative is a new Securities and Exchange
Commission rule that forces issuers to share key information
with all rating companies in addition to the one, or ones, it
pays, said Ralph Daloisio, a managing director at Natixis and
chairman of the ASF’s board of directors.

Should there be unintended consequences, a regulator would
be able to make speedier revisions than Congress, he said.

The ASF on Tuesday stepped up its presence in Washington by
naming Armando Falcon, former regulator of U.S. housing giants
Fannie Mae and Freddie Mac, as a new senior policy advisor.

“As a former regulator, regulators prefer discretion so
they can apply their experience to the issue,” Falcon told
Reuters. “To the extent something is hard-wired, it makes it
harder to adapt to changes in the marketplace.”

Congress appears to be deferring some decisions to
regulators on the topic of risk-retention, in which the issuer
would be required to align its interests with the investor by
holding a 5.0 percent stake in the issue, Falcon said. In one
Senate amendment, “super prime” mortgages that are least likely
to default would be exempted from the risk retention, which
reduces overall profits for the issuer.

Risk retention is already slowing the revival of private
residential mortgage securitization with most issuers unable to
come to terms on profitable ways to construct bonds, analysts
said. Still, a recent RMBS from Redwood Trust, a California
real estate investment firm, illustrated it’s not impossible.

Redwood, which was advised by Falcon, retained 5 percent of
the assets available to investors in anticipation of the
regulation. It will likely do more, having signed “flow”
agreements with lenders to purchase loans, Falcon said.

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US securitization group urges regulator flexibility