Will FDIC’s “Clarification” of Safe Harbor Rules Make a Difference

Earlier this month, the FDIC provided the American Securitization Forum a formal response to the ASF’s  interpretive request from August 2011 in connection with the FDIC’s final “Securitization Rules” published in September 2011.

The lack of clarity for how securitizations issued by “Insured Deposit Institutions” will be treated in cases of FDIC conservatorship or receivership has been vexing the structured finance markets since the beginning of the credit crisis.

On February 7th, the FDIC provided clarification to several key provisions or standards in the Securitization Rules; Disclosure, Servicer Best Practices, Reserve Funds for Repurchases, Underwriting of Obligations, Six Credit Tranched Limitation and Limitations on Advancing.

The basic premise is that the FDIC will agree not to utilize its powers to seize assets that have been pledged to a securitization issued by an insured institution, if the issuer can demonstrate that they have met each of the standards in the Securitization Rules, including the six  mentioned above.

Prior to the credit  crisis, most investors took for granted that assets pledged to an off balance sheet financing would be treated separately by the FDIC in cases of receivership or conservatorship.  However over the last several years, in word and some cases in deed, this “conventional wisdom” was challenged by the FDIC.  New powers granted to the agency under Dodd-Frank and the general climate for more aggressive interpretation of existing powers created increasingly higher levels of uncertainty among investors about their abilities to exert a lien on collateral which they believed was theirs.  This uncertainty has had a significantly detremental effect on the recovery of several key securitization markets, most notably RMBS.

We hope that these clarifications have the desired effect and they help investors to return to the market but we are not sure we are there just yet.  While these clarifications seem to close some gaps, it seems to us that the rules still leave too much room for interpretation.  Something more along the lines of a “firm policy statement” from the FDIC as to their projected treatment of securitizations against which these individual rules could be applied would be a bigger step in the right direction.

About markferraris
Managing Principal Orchard Street Partners LLC

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