A common denominator in housing finance reform is the importance of the role that the private-label RMBS market must play.

While regulators seem keen to work with the industry, the several pending regulatory changes slated to impact securitization structures tell a completely different tale.

Mary Schapiro, chairman of the U.S. Securities and Exchange Commission, delivered a keynote address at the American Securitization Forum's (ASF) 2011 Annual Meeting held in Washington D.C. on June 21 to 22. Shapiro emphasized her concern about the future of the mortgage securitization market and, specifically, the private-label RMBS market, which has almost completely evaporated in the last three years.

Other parts of the securitization industry have picked up, according to James Ahern, global head of securitization at Societe Generale. The market has seen $73 billion in year-to-date ABS issuance to mid-June, up by $20 billion from 2010 volumes. However, the asset class that remains absent is RMBS.

Ahern said that volumes in Europe, which has traditionally been the smaller market, last year surpassed issuance volumes in the U.S. He added that the Europeans have issued €325 billion ($560 billion) of paper, although 70% is being financed through the European Central Bank's (ECB) repo operations. Volumes year-to-date show that Europe has already done €140 billion of issuance with the majority still being financed via ECB repos.

Peter Sack, managing director at Credit Suisse, said that there has been a good bid for short-duration paper with strong technicals for most secondary, triple-A re-remics over the past three years. "RMBS has seen a sustained rally from March 2009 to March 2011 but that has changed in the last six weeks, and the sell-off in RMBS has been pretty significant," he said.

The credit fundamentals in mortgages have been bad for some time and investors are more pessimistic. As Schapiro said in her speech, "It is important to translate lessons learned at great cost into permanent reform while memories are still fresh. This was a driving force behind the Dodd-Frank Act, and for the securitization rulemakings that we at the SEC have undertaken separately."

However, what regulators hope for comes with a hefty price tag that ultimately makes securitization financing less cost effective for residential mortgages. Sack believes that the cost of funding is the fundamental constraint to new origination. "In the U.S., mortgages are competing with the government and bank balance sheets and ultimately you have to consider where the cheapest cost of funding is - it's hard to be bullish on the sector," Sack said.

According to market figures, around 95% of all U.S. mortgages have been financed by the government. Ahern estimated that the government has made $75 billion on that. "The Fed is making lots of money on the carry, and from the arbitrage they have made they have given the U.S. Treasury $110 billion in net income over the last two years," said Sack. "There is no strong incentive for a quick fix when you have the fundamentals that we are facing."

For RMBS, that scenario turns even more sour when figuring in the added costs of the 5% risk retention required by Dodd-Frank. "For autos the issue doesn't apply, but for mortgages it's very significant when you factor in key features of the requirement like premium capture cash reserve accounts," Ahern said.

The premium recapture provision on private securitization is likely to raise mortgage rates and make credit less available. This provision would require the creation of a cash account to prevent structurers from attempting to monetize what they define as "excess spread" (see "Premium Capture Accounts" and Private-Label MBS, ASR 6/2011). Industry players at the ASF event said that the issue of risk retention has called into question the fundamental view of securitization.

"If the intent of the rule is to promote securitization it has to make securitization be at least equal to other forms of funding mechanisms for financing a loan," said Luke Scolastico, senior vice president and head of trading at Bank of America Home Loans. "Securitization is an alternative for balance sheet management; it's an execution alternative."

Risk retention, he said, essentially shuts down the benefit of selling loans via securitization.

"I think that issuers will just decide that it is better to own the whole loan at a much better rate of return if they are no longer able to transfer the credit risk," Scolastico said at the ASF event.

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