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CAPITAL: Finding a Better Balance for Securitizations
There have been some interesting blogs recently on the shortcomings in the securitization market, and how to overcome them. This post from Naked Capitalism, in particular, deserves your attention.
The post outlines the FDIC’s proposals for shoring up securitizations. And it led me to look through the FDIC’s proposals in some detail. The request for proposal broadly asks many questions about securitization and I realized that the questions themselves offer a window into what the FDIC probably wants to see happen on the securitization market.
Two sets of FDIC questions stand out. The first addresses “economic interest in a material portion of credit risk,” while the second relates to “additional requirements to incentivize quality origination practices.”
To the first issue. The FDIC is suggesting that sponsors of securitizations retail “at least” an economic interest in the securitizations. The FDIC implies that:
- The economic interest be 5%; and
- The economic interest should vary by asset class and/or size of securitization.
Will those criteria become law? Of course, no one knows, but clearly the FDIC appears to be leaning toward including them in a revision of securitization rules.
And which practices does the FDIC want in place in order to incentivize quality mortgage originations? A requirement that the mortgage loans included in the RMBS be originated more than 12 months prior to any transfer for the securitization to align incentives to promote sound lending. But the FDIC appears as though it will add the 12-month condition as long as the restriction does not materially damage credit availability and institutions’ liquidity.
It is fair to say that change is coming to the securitization market. And if these clues offer any indication, the changes will be notable indeed.
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