Any new federal credit risk retention regulations should accommodate the needs of players in niche securitization sectors, according to the American Securitization Forum (ASF).
Tom Deutsch, executive director of the ASF, New York, a securitizer group, makes the case for generosity toward securitizers of “esoteric classes of assets” in a comment letter submitted to the agencies working on the proposed risk retention regulations.
Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires the regulators to develop regulations that would require securitizers to keep an economic interest in the credit risk of any asset-based security sold to another party.
Congress included the section because of concerns that mortgage lenders’ ability to transfer the risk of writing bad mortgage loans to buyers of mortgage-backed securities had helped create the credit market crisis that started in 2007.
The Dodd-Frank Act and the proposed regulations focus mainly on issues involving mortgage-backed securities and, in some sections, on securitizers of assets such as credit card receivables.
The proposed regulations do not mention life and health insurance-based securitization programs, such as programs based on catastrophic health insurance risk, annuity longevity risk or life settlement portfolios.
The ASF supports the idea of making changes in the securitization market and efforts to align the incentives of originators and securitizers with those of securitization investors, Deutsch writes in his comment letter.
“We believe that risk retention can aid in achieving this goal so long as the requirements are tailored to each asset class, taking into consideration that the forms of credit risk retention may differ by asset type,” Deutsch says.
But, in addition to the core group of assets frequently securitized, such as mortgages, other types of assets securitized have included intellectual property, church loans, equipment-related assets, mutual fund fees, timber, servicing advances, tax liens, transporation assets, and “insurance-related assets,” Deutsch says.
“All of these asset classes have their own securitization structures and practices that differ in important respects across each category based on a variety of factors, including the nature and characteristics of the assets, the historical development and credit performance of each asset class and the securitization structures themselves,” Deutsch says. “When crafting risk retention rules and providing appropriate exemptions, the joint regulators should consider the very large and growing universe of asset classes that exist beyond the core classes. Each of these esoteric asset classes provides necessary funding to various businesses and industries, and it is critical that the proposed regulations do not inhibit their growth.”