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FDIC’s Safe Harbor Action Harms Market Liquidity and Threatens Govt.’s Housing Market Exit, ASF Says

The American Securitization Forum (ASF) released a statement saying that the Federal Deposit Insurance Corp.'s (FDIC) action today will seriously harm the federal government’s ability to exit the U.S. housing market and to reestablish a private label mortgage market.

Today the FDIC placed a series of new conditions on Safe Harbor protection on securitizations in the event of a sponsoring bank’s failure.

"Securitization is key to virtually every plan for reducing the role of the GSE’s, including Fannie Mae and Freddie Mac, and restoring a private housing market," ASF Executive Director  Tom Deutsch.

Deutsch said that the FDIC’s rule today placing new conditions on Safe Harbor will make it extremely difficult for new bank-sponsored securitizations to happen. Even though some of ASF’s investor members might be supportive of some of the conditions in the new rules, they do not support the FDIC creating an ineffective Safe Harbor that will disrupt contractually scheduled repayments of their investments in the case of a bank failure.

Institutional investor members of the ASF, such as pension funds and mutual funds, stand to lose the most from today’s actions by the FDIC.

The ASF, along with most other commentators, called for a coordinated approach to securitization reform in its response in July to the FDIC’s Notice of Proposed Rulemaking and will make the same fundamental point in testimony this Wednesday before the House Financial Services Com-mittee’s hearing on Housing in the Wake of the Dodd-Frank Act.

"Regulators and policymakers have to work together so they do not inadvertently stifle securitization." Deutsch said. 

The ASF is particularly concerned that the FDIC has acted ahead of other regulators in an uncoordinated manner.

The trade group cited an incident last summer when the law of unintended consequences manifested itself after Dodd-Frank Act was enacted and critical securitization deals were stopped until the Securities and Exchange Commission issued a no-action letter temporarily dropping a requirement for ratings disclo-sure.

“The FDIC’s action today will seriously harm a bank’s ability to sponsor a new securitization and, therefore, will create an uneven playing field, pushing securitization activity to unregulated non-bank organizations," Deutsch said. "This will clearly hurt liquidity but will also mean that future securitizations may take place outside of a regulated structure posing new risks to the system instead of eliminating them."

He added that given the unrealistic implementation period of only three months until Dec. 31, many potential bank issuers will be relegated to the sidelines into 2011 because of the actions today.

What the FDIC Wants

Starting Jan. 1, FDIC-insured institutions will have to retain 5% of the credit risk on newly issued securitizations until the federal banking agencies approve new risk retention standards next year as mandated by the Dodd-Frank Act.

The FDIC board adopted the 5% risk retention requirement by a 4-1 vote in updating its safe harbor rules involving the treatment of MBS and other securitizations issued by failed banks.

"The rule is fully consistent with the Dodd-Frank Act to apply a 5% risk retention requirement," FDIC chairman Sheila Bair said, until the agencies adopt new mortgage underwriting and risk retention standards.

Ginnie Mae guaranteed transactions issued by banks are exempt from the FDIC rule. "We worked that out very closely with Ginnie Mae to make sure there were no unintended consequences," an FDIC official said.

The FDIC Safe Harbor rule only applies to bank issuers and does not affect MBS guaranteed and issued by Fannie Mae and Freddie Mac. In other words, it appears the rule will only apply to private-label securities.

The FDIC rule requires bank issuers to retain a 5% vertical slice of a securitization. The Dodd-Frank Act allows the banking agencies to lower the 5% risk retention requirement and exempt certain low-risk "qualified mortgages" from the set-aside.

The banking agencies are supposed to complete that rulemaking in the second quarter of 2011.
"We look forward to working with our colleagues in developing those standards," said Bair. "Once they are in place, our rule will automatically conform to the interagency regulations."

The FDIC board also approved a proposal on Monday that extends full deposit insurance coverage for certain non-interest bearing accounts until yearend 2012. This extension will continue coverage for escrow accounts deposited by mortgage servicers. The proposal has a short comment period that ends Oct. 15.

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