Sandra Thompson, director of the division of supervision and consumer protection at the Federal Deposit Insurance Corp., (FDIC) stated that "we are all facing tough times," which has "caused the government to intervene."
Thompson replaced FDIC Chairman Sheila Bair this morning as a speaker at the American Securitization Forum gathering being held in Las Vegas this week,
Thompson said that the securitization industry has a share in the blame for helping support what appeared to be "high-quality" financing in a low interest rate environment. She called for a reform of securitization, which she said has been "used and abused" by entities who wanted to make a fast buck. Thompson said that one of the keys to get the economy back on its feet was "going back to basics."
She made an honest assessment of the debt guarantee program by the FDIC called Temporary Liquidity Guarantee Program (TLPG), focusing on the part of the program that allows depository institutions to issue FDIC-guaranteed debt.
Thompson said that the program accomplished what it set out to, which was to restore stability in Interbank market lending, as evidenced by the fact that Libor has fallen sharply. However, the long-term goal of this program remains to enable these institutions to issue debt without the FDIC guarantee. There's some hope as she mentioned that there were two institutions in January that were able to issue long-term, senior unsercured debt.
She then turned her attention to the topic of jumpstarting the ABS market and mentioned four ways to do so: 1)alligning incentives 2) the simplification of pooled structures 3)the improvement of credit analysis and 4) the strengthening of the servicing arrangement.
She said that everyone should have "skin in the game" in the way securitization deals are structured, adding that there is no place for deal making that doesn't consider borrowers and investors. She called for a "simple and transparent process" in the underlying structures and greater accountability for the performance of underlying loans. This could be addressed through various ways, including call back provisions as well as perhaps making orignators have an equity stake in securitized deals. She said that there should be ways to "keep fast money out."
Thompson added that pooling and servicing agreements should be simplified and that there should be national standards and consistent agreements to guide servicers as to the scope of their authority to modify loans, noting that servicers have more leeway than what seems to appear on the PSAs and the process of determing the property's net present value of the property has to be more transparent.
Thompson also called for the credit analysis process to be more transparent, and decried the "over dependence" in the past on investment ratings that were questionable at best. She said that the market should move away from rating methodology that is complex and very murky, to analysis that is periodically updated and that adheres to best practices. She said that servicers should focus their resources on stemming forclosures.
Last year she said that two million foreclosures happened and the number keeps rising. She mentioned the FDIC's successful implementation of IndyMac Federal's streamlined modification process. She said that even with a 45% redefault rate, for instance, there is still more savings than with these loans going into foreclosure. Even at the 45% rate above, there is still a $400,000 aggregate savings if these loans would have gone into a foreclosure. The ultimate goal, Thompson said, is to stabilize home prices and restore stability to the economy.
"We need to get rid of the moral hazards that a bailout brings," Thompson said. "Private equity must return, helping guys with clean balance sheets, and in the process getting banks lending again." She added that, consumers or mainstreet are the "lifeblood for nation's future."