11/14/2008

Looming Regulatory Wave Vexes Industry

Securitization professionals are getting worried that the inauguration of President Barack Obama in January will usher in an onslaught of regulatory constraints that they've been able to beat back in the past.

The start of the Obama Administration, coupled with larger Democratic majorities in both the House and Senate, will likely lead to a revival of proposals that could make it more difficult, expensive or risky to issue and buy structured-finance products.

Indeed, overhauling the U.S. financial system "is one of the first missions of the new Congress," Sen. Charles Schumer (D-N.Y.), said Monday in an address at a SIFMA conference at the Marriott Marquis hotel in New York. Schumer is a member of the Senate Banking Committee.

The prospect of a radical new regulatory regime has especially riled the market for private-label mortgage-backed securities, contributing to a recent lack of liquidity and plummeting bond values.

"The markets are very skittish, and I think rightfully so, about that transition," said Greg Peters, head of U.S. credit strategy at Morgan Stanley. He spoke during a panel discussion at the SIFMA conference, which focused on the U.S. Treasury Department's financial-system bailout.

Securitization professionals are particularly concerned that the idea of applying "assignee liability" to MBS issues will get a new lease on life, even though they previously succeeded in pushing back that threat several times over the years. Such a measure would permit mortgage borrowers who feel they were wronged by the original lenders to pursue civil or criminal complaints against parties that assume interests in the credits down the line, such as whole-loan buyers, MBS investors and underwriters.

A bill along those lines passed the House last year, but languished in the Senate. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, has promised to reintroduce the measure in 2009.

"That kind of broad, sweeping extension of risk could seriously impede the securitization of any loan," one attorney said in an interview. It's widely believed that many investors and underwriters would avoid securitized products if they could be held liable for moves and decisions made by lenders and other shops involved in the deals.

Market players are also concerned that the federal government could adopt a more borrower-friendly approach to bankruptcies and loan modifications. Amending the terms of securitized mortgages could disrupt deal cashflows, causing pain for bondholders (see article on Page 3).

Buyers of future MBS offerings would also be forced to compensate for that risk by demanding more credit protection and fatter returns. That, in turn, would drive up the overall cost of credit in the U.S. "Those are huge potential issues for the mortgage-backed securities market," the lawyer said.

However, lawmakers are mulling some regulatory reforms that many agree would be good for the industry. For example, a government guarantee on modified mortgages would make the credits more palatable to investors.

The American Securitization Forum and Mortgage Bankers Association have been successful in the past in lobbying lawmakers to reject legislation that would stifle securitization. But the trade groups aren't saying how they plan to approach the looming wave of regulatory changes.

Meanwhile, the Financial Accounting Standards Board is finalizing a long-developing rule change that would eliminate the longstanding practice of using qualified special purpose entities to issue asset- and mortgage-backed securities. FASB's proposal would make it more difficult for issuers to move the underlying assets off their balance sheets.

Without that advantage, securitization may cease to be an economical funding route for many lenders - especially credit-card companies. The overall pool of receivables available for securitization could be further diminished if Congress and the Federal Reserve follow through on plans to stiffen rules that card lenders must follow when charging fees, changing customers' interest rates and allocating payments.

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