Marketplace Lenders to Benefit from New OCC Ruling

Last week, the U.S. Office of the Comptroller of the Currency (“OCC”), announced that they will grant specialized national charters to fintech lenders.  These specialized licenses could allow on-line lenders to avoid the morass of individual state regulations in the U.S.  Having to cope with individual state banking rules and regulators, has been a major obstacle to the growth of the marketplace lending industry in the United States.

Of course, no step forward comes without some cost.  One area fintechs will have to balance when considering a state charter verses a federal charter strategy will be subjecting themselves to U.S. federal rules and regulations under a national charter.  Several U.S banks are on the record saying that on-line lenders have an unfair advantage over banks that are currently subject to those federal standards.

It will be interesting to see how this plays out.  At any rate, simply providing marketplace platforms with another licensing option should turn out to be a net positive for the development of this industry.

STC Comments due to Basel Committee by February 5th

With some degree of fanfare, last summer EU regulators introduced proposed rules for Simple, Transparent and Comparable  (STC”) securitisations.  One theme was to create a platform for more favorable capital treatment for STC compliant securitisation programs.  If you have taken the time to read through these rules or guidelines, you might conclude that they are anything but simple.  Nevertheless, given the seemingly bottomless quagmire that EU regulators seemed to be in at the time (they have for years struggled to find a way to re-open the EU structured finance markets), this news seemed like a breath of fresh air.  For the first time in several years, issuers, bankers and investors began to feel like there was real hope for a much stronger revival in issuance levels.

However, if you speed ahead to November of 2015, the Basel Committee on Banking Supervision (“BCBS”) weighed in on the conversation with their views on how the proposed STC rules would impact capital requirements for both originators and investors.  These views came in the form of a “Consultative Document” which begins to shed light on the potential benefits (lower capital ratios) for securitisations which comply with the STC rules.  Comments are due to the BCBS by February 5th.

Based on our read through the Consultative Document, we are not sure if the BCBS makes the picture any clearer, as it relates to establishing a clear understanding of the real benefits associated with putting the hard work into ensuring a securitisation is issued as STC compliant and remains that way.   We will leave that interpretation to others with better insight but you could be left wondering if the benefits of the capital reductions could be overtaken by the costs of compliance with STC rules.

We are wondering if others may be coming to the same conclusion.


2016: The Year of Risk Retention

As the markets lift off for the new year, we suspect that 2016 might wind up becoming best known as the year when the dust and clouds surrounding risk retention for a securitization structures, all began to clear.

Over the years, there has been no shortage of prognostications for exactly how the “skin-in-the-game” rules, coming on the back of the structured credit market’s collapse (now more than eight years ago), would ultimately affect the long term prospects for a healthy and vibrant global structured finance marketplace.

Much attention has been focused on three major topics; the general impact of proposed new rules for the euro-securitization market, the global CLO market and the US residential mortgage-backed market.  Some have predicted complete disaster for one or all of these markets.  Others have loudly applauded these changes (although it is hard to understand how anyone can see clearly ahead yet to the long term impact).

For many years, we have been on the record with our view that it would be unproductive to paint all structures and all markets with the same brush and it would appear that many others feel the same way, as witnessed by the good progress being made across the industry to focus on the benefits or additional value to be derived from risk retention, on an asset class-by-asset class or market-by-market basis.  Particularly over the past two years, there has been lots of good work done by lots of smart people from both within the industry and within the various legislative and regulatory bodies that have worked hard over the past several years to get up to speed on the workings of these complex, yet systematically vital, instruments.

As we turn the corner into the first months of 2016 and these rules either start to come on line or as we get closer to key implementation dates, we should be able to see exactly how the risk retention rules for CLOs and US RMBS hold up, for good or for worse.  The impact on the euro market will probably continue to lag behind, consistent with the general lack of regulatory clarity and the resulting weakness in the that market’s recovery.  Nevertheless, there seems to be enough momentum among European regulators to suggest that we should also see some tangible finality to their approach to risk retention sometime soon.  We only hope that they too will acknowledge the need to drill down into individual asset classes and structural types, to match the progress we have already witnessed in other markets.

In any event, we suspect that by the time we get to end of 2016, we will all know much more about how risk retention helps or hurts the global structured finance markets.

Credit Unions Seek to Make it Easier to Securitize Loans

Earlier this week, the National Credit Union Administration (NCUA) Board of Directors approved a series of proposals which, taken together, will make it much easier for credit unions to make use of the securitization markets to finance their activities.  These proposals are aimed at making it easier for credit unions to tap into the capital markets for funding by:

1 – Clarifying that the securitization of loans made by credit unions is within the normal course of their business activities

2 – Adding a safe harbor protection for investors who buy into securitization programs of credit unions

3 – Streamlining of the loan appraisal processes which credit unions must adhere to when packaging loans for a structure.

One would think that these newly approved rules could have a dramatic effect on opening up the credit union market as a vital new source of loan product for arrangers of securitizations.  According to the NCUA, as of March 2014, credit unions in the US held nearly US$590Billion in assets.

China Pushing to Expand CLO Market

Following on some official indications from the PRC Central Bank last quarter, Reuters ran an article this week indicating that Chinese officials are anxious to open their bank loan markets up to foreign companies and to see securitization become a primary mechanism for rebalancing balance sheet risk among their domestic lenders.  It seems they have been paying attention to the benefits brought to both the US and European credit markets from the recovery of the market for CLO’s.

However, with both European and US regulators still kicking the can around about risk retention for CLO managers in their own markets, it may be interesting to see if Chinese officials offer a more attractive environment for CLO managers, particularly smaller manager firms which are decidedly disadvantaged in markets that require high retention.

It would seem that the sky is the limit in terms of available product in the China loan market.  From the Reuters article………. “About 90 billion yuan ($14.8 billion) of CLO products have been issued in China’s interbank market since 2005, according to Reuters calculations based on central bank statements.  That is a tiny fraction of the 70 trillion yuan in local currency loans outstanding at the end of September.”

That could mean an available market in excess of US$1 Trillion.  Consider that US CLO issuance may top out at US$85 Billion in 2013  and has been hailed as a poster child for the recovery of the global securitization market.  We are thinking that some managers may have already packed a bag!

Regulators Coming to their Senses About Skin-in-the-Game?

Last week, the Wall Street Journal ran an article detailing some of the latest discussions among regulators at the US Federal Reserve and the Federal Deposit Insurance Corporation related to the Dodd-Frank inspired rule that would require issuers of residential mortgage-backed debt to retain 5% of the value of loans in the program. 

More commonly known as “skin-in-the-game”, this half-baked solution to abuse in the US RMBS markets may have run its course and interestingly enough, before it actually becomes fully implemented.

The reasons are fairly obvious.  Just the threat of this additional “cost of issuance”, when combined with all the other regulatory uncertainties facing mortgage originators and other MBS arrangers has been enough to shock the private mbs market into a ghost of its former self.  Now it seems that these effects are finally sinking in with US regulators.  They may now see that the cure may actually be worse than the disease. 

Earlier in the year, the regulators signaled their intentions to scrap the “20% down-payment” or “QRM” rule.  Now the suggestion is that the other component to skin-in-the-game, the 5% retention rule, may now only apply to loans that are of an “interest-only” nature. 

While they are at it, can’t they just kill the whole thing and admit that the skin-in-the-game idea was a bad one from the beginning.  For more than four years, we have been saying that the issuers of mortgage-backed securities already have a ton of skin-in-the-game.  Their business models depend on a free-flowing source of capital that can only be found in a well-oiled mortgage-backed securities marketplace. 

This will never be more true then when the GSE’s are wound down over the next few years.  Right now they are the only game in town.  It has taken the regulators a few years to take note or perhaps they needed time to build their case.  Either way, it’s time to put a stick in this rule.

Legislation to Wind Down Freddie and Fannie Introduced in US Senate

Bloomberg is today reporting that a bi-partisan bill aimed at winding down the GSE’s Fannie Mae and Freddie Mac will be introduced by Senators Corker (TN) and Warner (VA) later today.

In the latest draft of the bill, Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac would be liquidated within five years. The two companies package mortgages into securities on which they guarantee 100 percent payment of principal and interest on underlying mortgages.

The new legislation would require private financiers to take a loss of 10 percent of the principal underlying securities.  Mortgage industry insiders that have seen the draft have been critical of that “first-loss” provision, as it is referred to in the draft, saying it is too big a change from the current system.

Fannie Mae and Freddie Mac would be replaced by a Federal Mortgage Insurance Corp. to continue existing efforts to build a common securitization platform able to help small lenders issue securities. It also would continue Fannie and Freddie’s existing multifamily guarantees.

We suspect that the games have only just begun for this piece of legislation and who knows what the final version will look like.  However, the movement towards restoring clarity and predictability to the origination and securitization process in the US residential market remains an important objective for all sides.