In comments submitted to federal regulators in response to the recent notice of proposed rulemaking on credit risk retention, SIFMA applauds the goal of aligning the incentives of originators, sponsors, dealers and investors through the retention of credit risk in securitization transactions. SIFMA strongly believes that implementation of the risk retention provisions of Dodd-Frank, if done in an appropriate manner, can play a key role in the recovery of the securitization markets, which is essential to the recovery of the broader economy.
Given the complexity and far-reaching importance of the proposal and the expectation that significant changes will need to be made to the rule as proposed, however, SIFMA concludes that the regulatory agencies involved should republish a revised rule proposal before it is finalized to provide a subsequent opportunity for public comment. The lack of clarity on certain basic concepts such as the meaning of “par value” and “ABS interest” make it difficult for market participants to fully understand the impact of the proposed rules. Because this regulation will fundamentally alter the securitization market and the economy, SIFMA believes it is necessary that regulators allow for another opportunity to comment on revisions to the original proposal before finalizing the risk retention rules.
“Implementing credit risk retention – which helps to align the economic interests between the parties that securitize assets and investors – is a crucial step towards boosting investor confidence and reviving the securitization market,” said Tim Ryan, president and CEO of SIFMA. “If the final regulations are going to realize the goals of Dodd-Frank to improve the securitization process, align interests, and promote sound lending decisions they must promote sound securitization and underwriting practices, effectively take into account the different features of various types of asset-backed securities, and most importantly provide incentives for all participants in the securitization process, from originators to sponsors to investors to participate in that process. We are concerned that as proposed, all these criteria have not been met.”
SIFMA also believes regulators should perform and provide details on an inclusive economic analysis of the rules, which incorporates factors such as a reduction in the currently outsized role of the GSEs in residential mortgage markets, capital standards changes embodied in Basel III, accounting standards, expectations of the timing and degree of recovery of private label mortgage securitization markets, and the general economic condition.
SIFMA filed two comment letters on the risk retention standards, one presenting the views of its member financial institutions that act as securitization sponsors or issuers, or underwriters, placement agents or initial purchasers in securitization transactions and the second presenting the views of its investor members of SIFMA’s Asset Management Group. Together, these groups offer a breadth of expert views and a unique perspective covering all facets of the market.
Both comment letters recommend against instituting the proposed “premium capture” provisions, which would make securitization uneconomical for many issuers by substantially eliminating the profitability of securitization transactions and along with it, incentives to securitize. The overall impact of requiring a premium capture cash reserve account as proposed in the rule could undermine efforts to revive the private market for residential and commercial mortgage-backed securities.
On the issue of securitizations of qualified residential mortgages (“QRM”s), which would be exempt from risk retention requirements, SIFMA supports the establishment of high quality mortgage lending standards as a key to the return of investor confidence. SIFMA’s members have different views, however, on whether that high quality loan standard should be rigid or more flexible, but agree that QRM and non-QRM markets must be liquid and able to serve consumers.
SIFMA’s originator, sponsor and dealer members believe regulators should implement a QRM standard which allows for a limited and reasonable range of compensating factors, which would be consistent with how responsible mortgage underwriting has been performed for decades. This group also believes the proposed debt-to-income ratios are too low, and will exclude many creditworthy borrowers. These members also stress the importance of the ability of securitizers to pool QRMs with non-QRM loans, with risk retention proportional to the amount of QRMs, in order that both small and large issuers are able to access the securitization markets in an appropriate and timely fashion.
SIFMA’s AMG supports the proposal’s establishment of a narrow exemption from the risk retention requirement for QRM, noting it creates a “gold standard” for mortgage loan underwriting which will promote a more stable, healthier and more liquid secondary market for mortgage securitization. AMG members believe that the alignment of economic interests and the origination discipline that will be fostered by risk retention will facilitate the return of private investors to the market
Both groups argue strongly that the proposed QRM servicing standards are wholly inappropriate in the context of this rulemaking, and should instead be developed through a separate and inclusive consultative process. SIFMA members believe that servicing should be a level playing field, and any standards should apply to all servicers, not just servicers of a limited subset of mortgages which are least likely to default.
The retention rules will impact a broad class of financial assets, including mortgages, credit cards, auto loans and student loans. There are over $10 trillion in outstanding mortgage- and asset-backed securities, and securitization is an essential component of the financial system, credit creation and a vital source of long-term bank funding. The $13.8 trillion of outstanding mortgages nearly equals the total size of bank balance sheets, and about $8.5 trillion of residential and commercial mortgages are securitized.