ABS market participants across the globe gathered together on Wednesday for a joint meeting of industry organizations including the American Securitization Forum (ASF), the Securities Industry and Financial Markets Association (SIFMA), the Australian Securitisation Forum and the European Securitisation Forum. The hot topic on the agenda was the pressing need to restore confidence in securitization.
While the announcement of the Term Asset-Backed Securities Loan Facility (TALF) was a step in the right direction - to restoring liquidity in the capital markets - confidence in the security product has to be jumpstarted as well, panelists said.
The meeting was called to present the findings and recommendations of the recently-formed global joint working group, designed to bolster confidence and improve securitization market functions. The team is co-chaired by Sanjeev Handa, head of global public markets at TIAA-CREF, and Jeff Perlowitz, managing director and co-head of global securitized markets at Citigroup.
Other working groups aimed at enhancing transparency in the ABS and MBS markets include the American Securitization Forum's Project RESTART. There was also talk last Wednesday of a Project VALUE, which will work toward a better understanding of how valuations are being conducted.
New Findings
Market participants have been vocal about the need for an industry rebound. The joint report, which included the results of 100 in-person interviews with securitization market participants conducted by McKinsey & Co., as well as the responses of 400 online questionnaires, details the steps that the securitization market feels imperative for change, panelists at the meeting said.
According to those polled, enhanced disclosure and standardization of information, restored confidence in the credit rating agencies, and greater price transparency were the most important steps toward restoring confidence in the system. Those surveyed also said that disclosure and valuation were the most critical factors for restarting the market in the near term.
The global joint working group suggested a series of industry changes, many of them centered around the idea of a universal method of reporting information. Highlights from the report's recommendations include standardized and ongoing transparency for U.S. non-agency RMBS and European RMBS, standardized due diligence disclosure for RMBS, and standardized core representations and warranties and repurchase procedures for RMBS.
Other recommendations centered around the development of industry-wide standard norms for RMBS servicing duties and evaluating servicer performance, as well as the expansion and improvement of independent, third-party sources of valuations - improving the valuation infrastructure and contribution process for specified types of securitization and structured products.
While enhancing transparency in the ratings process was also recommended, there was talk of the pendulum being pushed too far in favor of the investor. While there is concern that an issuer-pay model creates a conflict of interest that could push a deal's ratings too high, an investor-pay model could risk pushing a transaction's rating too low, not to mention the difficulty in collecting payment from all of the investors in a transaction, said panelist Steven Schwarcz, a Stanley A. Star professor of law and business at Duke University School of Law and founding/co-academic director of the global capital markets center.
There was also the familiar caution against using the credit rating agencies as a sole valuation tool, though TIAA-CREF's Handa did note that ratings are the common gauge that the market uses when buying or selling a bond.
The recommendations only go so far, as one audience member pointed out. These suggestions are geared for the new issuance market, and do not carry regulatory enforcement. "We are industry organizations, not regulators, so we don't have that regulatory power," said George Miller, executive director of the ASF. However, it is likely that the recommendations will be self-enforcing and market participants who choose not to follow them may not have access to the capital markets, he said.
Another critique of the report was that it favored investors over issuers, who would face increased costs and time spent implementing these initiatives. However, this is a necessary pain, said Jason Kravitt, senior partner at Mayer Brown; "everyone recognizes that things must change," he said. Panelists also agreed that in polling, the responses were remarkably similar by market participant, and issuers were consulted to the same degree as lenders or investors.
Panelists in London, New York and Australia, where it was 1:30 am when the conference began, stressed the soundness of the securitization structure in consumer ABS products, and the crucial role it plays in the capital markets.
"Securitization has brought the democratization of credit and made it available at a lower cost to borrowers," said panelist Greg Medcraft, chief executive officer and executive director of the Australian Securitisation Forum.
Indeed, more than 90% of people buying cars finance these purchases with loans or leases, and banks use securitization to finance approximately 50% to 60% of credit card assets on their balance sheets, Perlowitz said. Also significant, 70% of the homes in the U.S. have mortgages on them, he said, which makes securitization an important financing tool.
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