The securitization market just can't seem to get a break. From tougher regulations to a battered economy, our industry seems at times to be facing an all-out assault.
Case in point - July's amendment didn't abolish the more onerous rules that were part of Basel III, such as requiring banks to hold considerably more equity to meet higher capital requirements.
And as John Hintze discusses in his cover story, Basel III retained the liquidity ratio requiring costlier liabilities to fund ABS assets. The "annex" to the rules may have watered down some aspects but many of ones inimical to an active ABS market are still in place.
As we all know, ABS market players are already knee deep in regulatory rules, including consolidation rules under SFAS 166/167 and capital requirements mandated by the recently passed Dodd-Frank Act.
As if the row of regulatory hurdles weren't enough, securitization players also have to contend with varying approaches by different agencies. While there is coordination across government entities, some like the FDIC and SEC are also at risk of adopting rules in an autonomous fashion because of their specialized jurisdictions. Joe Adler from American Banker tackles this pressing issue in this month's ASR.
But remove this ugly regulatory backdrop, and the market would still be sluggish thanks to the weak economy. As my story points out, the Federal Reserve's efforts to stimulate the economy by keeping interest rates low through Treasury purchases haven't compelled consumers to take on more debt or banks to extend credit. The Fed's monetary policy, according to Wells Fargo analyst John McAlravey, can only go so far.
It seems that there's no relief in sight. Even an attempt to restructure the GSEs to help a troubled mortgage sector might not work, as Bill Berliner notes in his September column. Unfortunately for would-be reformers, he said, the time when issuers had non-agency securitization options at their disposal was much more conducive to fundamental GSE reform than now, when the housing market is very dependent on GSE-backed financing. Efforts to reform Freddie and Fannie run the risk of inadvertently weakening the housing market.
The situation in Europe is no less bleak. Nora Colomer writes about two deals that have encountered mishaps and underscore weak market fundamentals. Non-call risk in European RMBS transactions, for instance, reignited last month when Portuguese bank Caixa Economica Montepio Geral said it would not exercise the scheduled call for its Pelican 2 RMBS. Analysts said this is not surprising considering the current economic climate in Portugal and the tough environment facing banks. The Pelican deal is in good company as there have also been numerous other RMBS offerings from the country that have extended beyond their call dates. U.K.'s Eurosail 2007-3BL RMBS is also in trouble as the courts ruled against A3 noteholders' claim that an event of default had taken place and that the deal should now be paying according to the post-enforcement waterfall.
In Latin America there is a more hopeful tone, not least because of the regions heavy infrastructure needs. As Felipe Ossa reports, outdated infrastructure in Peru's fast-growing economy is crying out for funds to expand and modernize. ABS has proven an effective catalyst for roads there over the last few years and the introduction of the water sector to securitization this year signals that this form of financing is suitable for other infrastructure sectors as well. Finally, Felipe covers a deal for the state of the state of Mexico that has several novelties, including the involvement of U.S. agency Overseas Private Investment Corp.
Karen Sibayan, Editor