FDIC Risk-Retention Proposal May Harm Securitization Market, Industry Says

U.S. securitization and mortgage- industry groups said a Federal Deposit Insurance Corp. plan for overhauling part of the $4 trillion asset-backed securities market could restrict credit and undermine economic recovery.

The FDIC proposal requiring sellers of securitized loans to keep 5 percent of credit risk in exchange for protection that makes the bonds more attractive to investors “could greatly inhibit its effectiveness and the restart of the markets,” Tom Deutsch, executive director of the American Securitization Forum, said in a comment letter filed with the agency today.

Deutsch’s group joined the Financial Services Roundtable and the Mortgage Bankers Association in opposing the proposal, released for public comment in May, saying it could damp recovery of the securitization market, which has been largely inactive since 2008. The comment letters also pointed to risk- retention rules moving through Congress and other regulators as reasons the agency shouldn’t act.

The FDIC “should leave such sweeping national policy changes to Congress and should avoid potentially conflicting with the provisions” of the financial-overhaul bill nearing final approval in Washington, Mortgage Bankers Association President John A. Courson said in a letter.

Asset-backed debt was among the largest sources of more than $1.7 trillion of writedowns and credit losses at financial companies since the start of 2007, according to Bloomberg data.

Additional Disclosure

The FDIC proposal would require additional disclosures by sellers, including the structure of the bond and the credit and payment performance of its loans. It also would seek disclosure of compensation paid for securitizations. The agency, which set today as the deadline for comment on the measure, could put a final rule in place as soon as this fall.

“These reforms will help restore confidence in these markets, but in a way that promotes long-term, sustainable home ownership,” FDIC Chairman Sheila Bair said in a June 7 speech in Virginia.

The regulatory-overhaul bill awaiting final Senate approval after being passed by the House yesterday includes a 5 percent risk-retention requirement for securitizations. The Securities and Exchange Commission in April approved a proposal to require financial firms to hold 5 percent of each class of asset-backed security to avoid regulatory hurdles when selling bonds.

The FDIC’s proposal is “complementary to similar efforts under way at the SEC and new rules under consideration as part of the financial reform package,” Bair said in a June speech at the University of Pennsylvania’s Wharton School in Philadelphia.

To contact the reporter on this story: Phil Mattingly in Washington at pmattingly@bloomberg.net.

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