In a response letter to the Federal Deposit Insurance Corp. (FDIC), the American Securitization Forum (ASF) expressed its concern that current FDIC Safe Harbor proposals could threaten investor certainty in the securities that they own.
Without the guarantee of the Safe Harbor, investors, according to the ASF, will not have the assurance that they would receive timely payments for their ‘AAA’ rated investments. The uncertainty could bar the reopening of the securitization markets, the association said.
The Safe Harbor proposals were originally established so that investors could look to securitized assets for payment without worrying about whether or not the FDIC would sieze those assets in the event of a bank failure, the ASF said.
Recent proposals from the FDIC would revise the rule to include several preconditions before the Safe Harbor could apply, such as requirements relating to a transaction’s capital structure, disclosure, documentation, origination, and compensation.
These factors have driven the ASF to propose the applicability of the Safe Harbor not be conditioned upon the various requirements set forth in the proposed rules.
The organization’s letter requested that new requirements be limited to clear, bright-line conditions that will still allow investors to rely upon the Safe Harbor without fear that its benefits could eventually disappear.
Additionally, it expressed the ASF’s gratitude for the FDIC’s demonstrated support for sustainable securitization and the regulator’s efforts to foster dialogue regarding targeted reforms in the market.
“Large institutional investors, such as pension funds, mutual funds and insurance companies, seek out highly rated securitizations for their strong yields and cer-tainty of timely payments on their investments,” said Tom Deutsch, executive director of the ASF. “The FDIC’s proposals would cast a deep shadow over the certainty of payments on ABS and MBS by creating an ineffective safe harbor, which will deter our investor members from reentering these critical markets for the availability of mort-gage, consumer and business credit.”
The ASF agreed that a legal isolation Safe Harbor is important in its efforts to reestablish active and sustainable securitization markets. However, it is concerned that the proposed preconditions currently proposed by the FDIC could limit the scope of investor protections. The ASF called for the cooperation and coordination among regulator agencies in light of recent financial reform legislation.
“The ASF is a strong advocate for targeted reforms in the securitization market, but we believe that reforms should only arise out of an inter-agency process to ensure a level playing field for all market participants,” Deutsch said. “Congress is very close to finalizing certain mandates for the securitization markets that call for close coordination of a number of different agencies.”